Euro hits a 13-month high of $1.11 on ECB-FED monetary divergence

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Vrasidas Neofytou
Head of Investment Research

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Euro hits a 13-month high of $1.11 on ECB-FED monetary divergence

The shared currency hit a 13-month high of $1.11 against the dollar on Wednesday afternoon given the recent weakness on the greenback, the soaring U.S. banking concerns, and the monetary policy divergence between the ECB and Federal Reserve.

EUR/USD pair, Weekly chart

Euro has been getting support from the resilient economy in Eurozone in contrast to the first signs of contraction in the U.S. economy, the banking crisis, and the prospects for a less hawkish Fed ahead.

Eurozone’s inflation pressure remains strong despite the falling energy prices, forcing European Central Bank to maintain its hawkish monetary stance, while at the same time, U.S. inflation is softening, and with a combination of weaker economic data and earnings, is pressuring Fed to change its stance on the fight against inflation.

The dollar’s weakness supports Euro:

Euro has gained traction this week following the ongoing softens on the dollar, especially after the regional First Republic Bank reported on Monday more than $100 billion in customer withdrawals during the first quarter.

Investors have become sellers of the greenback and buyers of the euro as the sharp loss of nearly 70% on First Republic Bank’s shares since Monday, has resumed concerns about banking contention in the U.S. banking sector, at a time the banking system in Eurozone remains resilient despite record-high rates, inflation, and Ukraine war.

Hence, the greenback’s outlook has turned negative lately as the weaker-than-expected economic data and the softer corporate earnings have elevated fear of a recession in the world’s largest economy.

As a result, the DXY-U.S. dollar index, which tracks the value of the greenback against six major peers (the Euro weighs 57.6% on the index) has retested the yearly lows of 101 this week, coupled with the losses on the U.S. Treasury yields amid uncertainties over the Fed’s monetary actions.

Investors largely expect Fed to hike rates by another 25 bps on the next FOMC monetary meeting on May 02-03, while most of them also expect to pause in June, and start cutting rates after September, which will be positive for Euro.

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