What’s Behind The Euro Rally?

Image Source: Pixabay

The common currency jumped across the board, with European stock markets holding onto solid gains on Wednesday as risk-off tone has abated somewhat. EURUSD bounced strongly off two-year lows to regain the 1.0800 figure during the European trading hours. In the process, the pair advanced to a nearly one-week high of 1.0866 before giving up some of the intraday gains in recent trading.

In fact, there are two major drivers behind the recent rally in the European currency. First, the greenback is retreating across the market today as traders take profit after the dollar’s jump to March 2020 highs around 101.00. The USD index came off peaks to settle around 100.50 ahead of the opening bell on Wall Street while still staying overbought. Of note, the downside potential is limited for the time being, especially as US Treasury yields stay elevated. 

Second, euro bulls cheered a hawkish twist from the ECB as the governing council member Kazaks hinted at a possible interest rate hike in July, citing significant inflation risks. The policymaker also noted that the central bank’s ‘gradual approach doesn’t mean a slow response’. Money markets are now betting on more than a 50% chance of a 0.25% rate hike by July. 

However, as Kazaks is one of the more hawkish members, it remains to be seen what the rest of the governing council think on the matter. It looks like the euro could be disappointed eventually as Kazaks' remarks may be too premature due to rising economic risks in the Eurozone.  

In other words, the recovery in the common currency is likely to be short-lived, with strong bearish trend persisting amid geopolitical and economic instability these days. In the immediate term, EURUSD needs to hold above 1.0800 in order to see more robust gains before attracting renewed selling pressure that would take the pair down to fresh long-term lows.