Commerzbank’s Michael Pfister argues that recent EUR/USD weakness reflects a stronger US Dollar (USD) rather than a fundamentally weak Euro (EUR), as the Euro has outperformed the G10 average. He highlights that softer expectations for European Central Bank (ECB) tightening versus a more hawkish Fed have widened rate differentials. However, the ECB’s proactive June hike and an anticipated September move are seen as supportive for the Euro over the coming months.

ECB front-loading underpins Euro resilience

"The reason for lower EUR/USD levels is quite straightforward: expectations regarding the ECB have eased significantly in the wake of lower oil prices, while expectations regarding the Fed have moved in the opposite direction in light of hawkish comments."

"Expectations regarding the ECB have also been scaled back."

"Our economists strongly anticipate a further interest rate hike from the ECB in September."

"With only 21 basis points of tightening priced in by December, this is likely to provide some support for the euro."

"In the long term, however, the fact that the ECB tightened policy so early on is likely to send a strong signal."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)