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Sep 07 - 11:55 AM

EUR/USD - COMMENT-EUR/USD Downside Risks Increase As Fed, ECB Paths Could Diverge

By Christopher Romano  —  Sep 07 - 09:50 AM

EUR/USD hit a fresh 3-month low Thursday and the slide could extend toward the 1.0500 area as diverging economic performances from the euro area, China and the U.S. could lead to the Fed and ECB toward differing policy paths.

China's August exports and imports came in above forecast but fell from the prior year while the trade balance surprised to the downside, fueling concerns about global growth and the euro area economy, which depends on China.

A sharp fall in July German industrial output and a downwardly revised Q2 euro zone GDP reinforced investors' economic worries, which have heightened the perception that the ECB could hold rates steady despite the central bank's inflation concerns.

The data also increased bets on the ECB cutting rates in Q2 2024 FEIM4.

Meanwhile U.S. data has led markets to consider the possibility that the Fed to hold rates higher for longer or possibly hike further.

Weekly initial and continuing claims were below estimates and Q2 unit labor costs were revised upward which could force the Fed to exert more effort to fight inflation.

U.S.-German yield spreads US2DE2=RR should continue to favor the dollar on the prospect of diverging policies.

Unless the Fed takes a less hawkish stance, EUR/USD's downside risks will remain.

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Refinitiv IFR Research/Market Commentary


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