EUR/USD: Speed bumps on the road – OCBC

Euro (EUR) slipped overnight, consistent with our caution for slower pace of gains or even some consolidation in the interim. ECB minutes overnight highlighted concerns of EUR’s appreciation and higher tariff that may affect exports. EUR was last at 1.1781 levels, OCBC's FX analysts Frances Cheung and Christopher Wong note.

Bullish momentum on daily chart shows signs of fading

"It made some specific comments- 'Since the April tariff shock, the EUR/USD exchange rate had decoupled from interest rate differentials, partly owing to a change in hedging behaviour. Historically, the euro had depreciated against the US dollar when volatility in foreign exchange markets increased. Over the past three months, however, it had appreciated against the dollar when volatility had risen, suggesting that the euro – rather than the dollar – had recently served as a safe-haven currency.' It also noted that 'Despite comparable funding costs on the two sides of the Atlantic, when taking into account currency risk-hedging costs, US companies had increasingly turned to euro funding. This underlined the increased attractiveness of the euro'."

"Statement also noted that latest projection saw inflation cooling to 1.6% in 2026 before returning to 2% in 2027, with the economy perking up thanks to higher public spending in Germany. ECB also indicated that 'While energy prices and exchange rates were likely to lead to headline inflation undershooting the target for some time, inflation dynamics would over the medium term increasingly be driven by the effects of fiscal policy'. We had earlier highlighted that comments from ECB officials this week likely marked the first hint of concern or slight discomfort around the EUR’s pace of appreciation. We noted that several ECB officials made remarks on currency this week."

"ECB Vice President Guindos said that a rise in the euro beyond $1.20 could make things “much more complicated”, though he sees current levels as no cause for concern. ECB’s Simkus also commented that the speed at which the EUR is rising is something the ECB must monitor particularly carefully. That said, there are also ECB officials who do not seem overly concerned. Overall, our constructive outlook on EUR remains intact though we see risks of slower pace of appreciation in the interim due to event risks – relating to recent ECB comments, 9 th July truce deadline and from a positioning point of view. Bullish momentum on daily chart shows tentative signs of fading while RSI turned lower from overbought conditions. Support at 1.1630, 1.1550 (21 DMA). Resistance at 1.1820 levels, before 1.1920 levels. While we cautioned for slower pace of gains or even some consolidation in the interim, the bias remains to buy dips."