Euro: Policy divergence supports gains against US Dollar - DBS

DBS Group Research’s Philip Wee argues that the Euro (EUR) may find support in coming weeks as markets reassess geopolitical risks and central bank divergence. He highlights investor unease over Federal Reserve (Fed) Chair Kevin Warsh’s push to end forward guidance, contrasting it with the European Central Bank’s (ECB) clearer framework. The analysis focuses on EUR/USD’s potential to break its recent trading range.

ECB clarity contrasts Fed uncertainty push

"Against this volatile geopolitical backdrop, the coming fortnight may underpin the EUR, driven by a market preference for the European Central Bank’s new and transparent Framework Guidance over Fed Chairman Kevin Warsh’s campaign to end forward guidance."

"The ECB has flagged a tactical pause at its governing council meeting on July 23. However, the market is currently pricing in an 87.8% chance of a 25-bps hike to 2.50% at the subsequent September 10 meeting. If the ECB affirms this trajectory, the EUR/USD pair could break above this month’s tight range of 1.1360 to 1.1480."

"Conversely, Warsh’s testimony to US lawmakers last week confirmed his intention to restore an "uncertainty premium" to the market’s pricing for a September hike. Warsh plans to use the July 28-29 FOMC meeting to foster an "honest internal discussion" with his colleagues at the Fed."

"Markets will become anxious that slashing the FOMC statement and Warsh’s refusal to provide his own forecasts at his first FOMC meeting in June could be a prelude to stripping the dots and the Summary of Economic Projections of their market-moving authority at the September meeting."

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