Danske Research Team notes that EUR/USD started the week under pressure as widening interest rate differentials favor the US Dollar over the Euro. Markets are increasingly pricing a further Federal Reserve (Fed) hike under new chair Kevin Warsh, while expectations for additional European Central Bank (ECB) tightening have been scaled back after comments from President Lagarde. The bank expects EUR/USD to stay heavy near term.

Rate divergence weighs on Euro

“EUR/USD traded on a heavy note to start the week as the spread between USD and EUR interest rates continued to push higher.”

“Expectations in the market about a possible rate hike in the US continues to build after new Fed chair Kevin Warsh’s first FOMC meeting last week, while the market further scaled back on the prospect of another ECB hike the coming months after comments from President Lagarde.”

“In rates space, US yields played catch-up during yesterday’s session rising roughly 5bp across the curve while European yields moved lower by a similar magnitude.”

“Euro area consumer confidence rose broadly as expected to -17.7 in June (cons: -18.0, prior: -19.0), though it remains well below pre-war levels and the historical average.”

“In the euro area, June flash PMIs are released. Most respondents will likely have answered after the US-Iran deal, yet the impact of lower oil prices is unlikely to already show up in activity data. We expect manufacturing to edge down to 50.9 (May: 51.6), while we expect services to see a modest improvement to 48.8 (May: 47.7), though still below 50 indicating contraction. The improvement in services is expected to be partially driven by French data correcting from particularly low levels.”

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