Swissquote Bank: Euro depreciation to parity against US dollar on table

15 apr 2024

The gap between the Fed and the ECB rate cut expectations widened to the highest level this year.

‘The US dollar strengthens on the back of a severe deterioration in Fed rate cut expectations following strong jobs and inflation data, and the dollar outlook remains comfortably bullish,’ comments Swissquote Bank today. ‘The US 2-year yield hit 5% post-US CPI data, and the probability of a June Fed rate cut fell to around 22%. July cut expectations is around 50-50, and a September rate cut is given around 73% chance.

And you know the election narrative, that the Fed may not opt for a rate cut approaching the November presidential election, which would delay the first cut to after the election. And some believe that the Fed’s next move won’t be a cut, but a rate hike to tame rising inflationary pressures. That’s a significant readjustment compared to the expectation of six rate cuts in January.

While the US data continues to cement the strength of the US economy and the fact the US doesn’t need to cut rates – and should not be cutting rates with heating inflation – the rate cut expectations elsewhere remain pretty solid. Last week’s ECB meeting gave another hint that the bank will more likely than not cut its own rates in June. ECB Chief Christine Lagarde said that the ECB is data dependent and not Fed dependent and other members noted that it’s time to ‘diverge’ from the Fed, as the US consumers are relentless – and the US government is very supportive – with Biden looking to cancel $ 7.4 billion in student debt to please young voters before the election.’

Fed-ECB gap widens

‘As a result, the gap between the Fed and the ECB rate cut expectations widened to the highest level this year following a dovish ECB stance and another set of strong jobs and inflation read in the US. And the chatter of a further euro depreciation to parity against the US dollar is being brought back on the table. At the current levels, the RSI indicator is very close to the oversold territory, meaning that the euro was sold too rapidly in a too short period of time and a correction could be needed. But most traders will be looking to sell the tops in the EURUSD on the back of the growing divergence between the soft ECB and the Fed – that simply can’t justify a rate cut this summer.’