On Friday, the EUR/USD exchange rate momentarily climbed above 1.05 after reports emerged suggesting that Washington might not be as aggressive with tariffs on China as initially anticipated. This news caught the attention of ING’s FX analyst, Chris Turner.
Looking ahead, the major events to watch out for are the upcoming Federal Open Market Committee (FOMC) and European Central Bank (ECB) meetings. Recent market movements have seen a rise in short-term Euro swap rates due to speculation that the ECB may not need to implement as dramatic cuts as expected. Conversely, U.S. short-term swap rates have dipped following news that tariffs might not result in significant inflation, which could allow the Federal Reserve some leeway to ease policies more effectively. This scenario has led to a narrowing of the two-year EUR/USD swap differential to around 165 basis points, marking the closest margin since early November.
Turner describes these developments as part of a correction phase. His quarterly forecast for EUR/USD, which anticipates a gradual decline towards the 1.01 mark by the end of the year, partially hinges on the expectation that this rate differential will expand back out to 200 basis points. Only time will tell.
For now, we can expect the EUR/USD to remain within a 1.0400-1.0500 range in the short term. The key factors that might trigger further movement are the forthcoming FOMC and ECB meetings set to take place on Wednesday and Thursday, respectively.
