The Euro (GBP) has seen little upside despite rising market expectations for interest rate hikes, with recent gains in EUR/USD largely reflecting a weaker US Dollar (USD) rather than stronger euro fundamentals, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

ECB policy boost limited for EUR as hopes remain tentative

"Market-based interest rate expectations have recently been revised upward, including for the eurozone. However, the euro has not yet been able to benefit significantly from this, as shown by our currency index, which measures the performance of the single currency against the G10 average. This is certainly due to the fact that hopes for interest rate hikes have been very tentative so far and still seem a long way off."

"ECB President Christine Lagarde had already signaled in advance that growth forecasts would be revised upward, so this is likely already priced in. There are also arguments in favor of a more dovish stance: on the one hand, the inflation forecast is expected to be lowered due to the postponement of EU ETS2. On the other hand, the positive growth outlook, especially for the eurozone's largest economy, Germany, has begun to falter, as yesterday's weak Ifo business climate index once again underscored."

"There is therefore much to suggest that the euro cannot expect any significant boost from monetary policy in the foreseeable future. However, this is not a major setback for our EUR/USD forecast. For this, it is sufficient for the euro to remain on its recent stable path. In our view, momentum is likely to continue to come primarily from the US dollar. The movement from levels around 1.15 at the end of November to almost 1.18 recently was almost exclusively due to a depreciation of the US currency."