Euro Soars on Reduced Rate Cut Expectations and Trade Truce Hopes
The euro is poised for its strongest weekly performance in over a year as investors reduce their bets on interest rate cuts and anticipate a delay in the implementation of US trade tariffs.
The common currency has gained around 2% against the dollar, its most significant increase since July 2023. This rally is partly attributed to the weakening dollar, which is heading for its worst week in 14 months against a basket of major currencies.
The euro's resurgence reverses a downtrend that began in September, largely driven by fears of President Donald Trump targeting Europe with tariffs. However, Trump's initial focus on Mexico and Canada has eased those concerns, buying more time for Europe.
"Trump's delay in implementing tariffs against Europe has helped to partially reverse the euro's bearish momentum," said Roberto Cobo Garcia, head of G10 FX strategy at BBVA, who predicts the euro's recovery to continue in the short term. "Valuations, technicals, positioning, and market pricing for the European Central Bank all suggest that the euro's short position is somewhat excessive."
A stronger-than-expected German PMI reading further boosted the euro on Friday, pushing up the two-year German bond yield and prompting traders to scale back their rate cut expectations. Markets now anticipate approximately 90 basis points of monetary easing from the European Central Bank this year, compared to 86 basis points on Thursday.
Speculators had placed large bets against the euro, reaching their highest level in around three years, due to concerns that trade restrictions would exacerbate the euro zone's economic slowdown and necessitate deeper rate cuts. However, this week's "risk reversals" in the options market suggest that traders still favor a bullish dollar position against the euro.