EUR/USD took a nosedive in May, dropping below the 1.0700 handle towards the end of the month and hitting its weakest point since mid-March. The sell-off, however, appears to have run its course, with the exchange rate staging a solid turnaround of late. This past week alone, the pair soared 1.8% to 1.0940, notching its best level since May 11, driven in part by broad-based weakness in the U.S. dollar following the FOMC announcement.
At its June meeting, the Federal Reserve kept borrowing costs steady, but signaled 50 basis points of additional tightening through year-end and higher-for-longer rates. The aggressive policy roadmap was not enough to keep the U.S. currency afloat as traders were skeptical of the central bank’s plans to resume hiking again, perhaps due to fears of a possible recession
Market expectations are unlikely to converge towards those of the Fed unless incoming data confirms that the U.S. economy remains in good health. However, there are no major economic reports that could offer valuable insight into the outlook in the coming days, so traders may stay true to their convictions for now. This could prevent U.S. Treasury yields from repricing higher, biasing the U.S. dollar to the downside in the near term.
On the other side of the equation, sentiment surrounding the euro has started to become more positive again, especially after the ECB noted that it is “very likely” that it will deliver another hike next month and marked up its core CPI projections for 2023, 2024 and 2025. Higher underlying inflation could translate into a more restrictive monetary policy stance over the forecast horizon, even if the central bank is not yet ready to endorse that view.