The euro is breaking out from an eight-week range and is at the best levels since November 2021.
The three-and-a-half highs comes as the US dollar weakens broadly but there are also some euro-specific factors in play. Here are five things driving the move:
1) The latest leg comes after US initial jobless claims rose to the highest since October at 248K compared to the 240K consensus. Notably, this is the third week in a row of elevated claims, which starts to make it look like more of a trend than a one-off.
2) The ECB signalled last week that it's likely to pause rate cuts for the summer. A series of eight consecutive 25 bps cuts has the market thinking they're at -- or near -- a cyclical bottom.
3) The Fed could be behind the curve on rate cuts. Tariffs have made US policymakers hesitate on rate cuts as they could re-invigorate inflation. But there's a good chance all the turmoil around tariffs could hurt growth and if the Fed is slow to react, it ultimately might have to cut further.
4) The US-China framework is a disappointment. Two days of talks led to some hopes for something bigger than a handshake to implement some things that were agreed earlier in Geneva. US officials have also said that current tariff levels won't change so the path to genuine improvement is looking narrow.
5) Europe has opened the spending taps. The game-changer in the euro this year was Germany suspending its debt brake in order to rebuild military capacity. There is a consensus in Europe now that higher government spending is needed
6) War is weighing. The short-term driver for US dollar weakness is that the US may soon find itself in a hot war in Iran. The US budget is already busted and Iran is no easy target. The war in Iraq cost around $3 trillion everything costs more today than it did then, let alone all the geopolitical risks that come with war.
7) The dollar is a crowded trade. The dollar index is at a three-year now but that follows a 10-year period of US dollar outperformance and the retracement has been moderate so far. There is a structural dollar position that may need to unwind as US assets underperform. For instance, Deutsche Bank yesterday illustrated how pensions are over-exposed to USD assets.
Greg talks more about euro levels that are in play here:
This article was written by Adam Button at www.forexlive.com. Read More Details
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