Danske Research Team notes that stronger US data and rising energy prices are supporting the US Dollar and weighing on EUR/USD. The bank highlights Fed member Logan’s concern that higher rates may be needed later in 2026 and maintains a forecast for Fed hikes in December and March. They project EUR/USD to trend lower towards 1.12 over the coming year.

Fed hikes and energy support Dollar

"In the US, ADP's National Employment Report for May landed close to expectations at 122k (cons: 117k), but it was noteworthy how the jobs growth was very broad-based across sectors and firm sizes. Moreover, the ISM services index ticked higher to 54.5 (cons: 53.8, prior: 53.6), driven largely by accelerating growth in new orders. The prices subindex reached its highest level since August 2022, while higher oil prices add to the upside risks for inflation."

"In the euro area, the final May services PMI was revised significantly up to 47.7 from 46.4 in the flash estimate, lifting the composite PMI to 48.5 from 47.5. While still in contractionary territory and pointing to weak underlying activity, the outturn is less negative than suggested by the flash release."

"In the US on Friday, the May Jobs Report is released in the afternoon. We forecast nonfarm payrolls at +110k, slightly above consensus, the unemployment rate at 4.2%, and average hourly earnings at 0.3% m/m. A solid report could tilt the Fed's balance of risks further towards a tightening bias."

"Against this backdrop, Fed member Lorie Logan noted she is increasingly concerned that higher interest rates could be necessary later this year, echoing recent similar language from other FOMC participants. We continue to expect Fed hikes in December and March and forecast EUR/USD trending lower towards 1.12 over the coming year."

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