Expert Analysis: Euro Weakens Against Dollar Due to Dovish ECB Outlook
Potential Retest of Support Level at 1.110 for EUR/USD
According to ING’s FX strategist Francesco Pesole, the recent drop in EUR/USD can be attributed to the USD gaining strength, as well as concerns over the European Central Bank’s dovish stance compared to the Federal Reserve.
Pesole highlights that the USD:EUR spread has tightened below 100bp following Powell’s speech, indicating a possible retest of the 1.110 support level for EUR/USD. Despite expectations of a 50bp rate hike by the Fed by year-end, only 64bp are anticipated by the ECB, leading to potential realignment in rate differentials.
Although the eurozone’s return to recession could contribute to this realignment, Pesole believes that the recent rally in EUR/USD is unlikely to be completely reversed. However, he suggests that the lack of key US data may favor the dollar in the short term, with a possible retest of the 1.110 support level.
Looking ahead, eurozone CPI figures will provide further insight into the divergence between the ECB and Fed rate expectations.