Pure excitement in EUR/USD

This week will be one of the most exciting weeks for EUR/USD in a long time, with the first estimate of euro area Q2 GDP due Tuesday, followed by euro area July inflation and the Federal Reserve (Fed) meeting on Wednesday, and US payrolls on Friday, Commerzbank’s FX analyst Michael Pfister notes.

EUR/USD is set to test lower levels

“Since the inflation surprise in mid-July, expectations have even decoupled somewhat from those for the BoE and the ECB. This is despite the fact that rate cut expectations for the three major western central banks have been quite synchronised since the beginning of the year. However, the market is now pricing in just about half a cut more from the Fed by the end of the year.”

“It is unlikely that the Fed will cut rates more than twice this year. On Wednesday, it is likely to lay the groundwork for a first rate cut in September. For three rate cuts this year, however, Chairman Jerome Powell would have to make a significant U-turn. On the other hand, there is unlikely to be much positive news for the Euro this week. Growth is also likely to remain uneven. If this happens as expected, the market is likely to price in further ECB rate cuts.”

“In short, there are more downside risks on the Euro side, while the Fed is likely to be preparing for a cut, but market expectations have gone a little too far. If this unfolds as expected, there is much to suggest that the market's interest rate expectations will tend to converge again. And that EUR/USD will test lower levels.”

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