Euro underestimates the economic risks in Europe

FX:EURUSD   Euro / U.S. Dollar
After a rally amid a widespread dollar sell-off following a more cautious Fed’s stance at the meeting, the euro capitulated much of the previous gains and turned negative on Thursday. The common currency resumed the ascent today but the impetus looks too modest to bring the pair back above 1.15.

The key reason behind the latest bearish correction in the EURUSD pair was the statement from the Bundesbank President Jens Weidmann. According to him, economic weakness is likely to extend into the current year. Considering that Weidmann is an outspoken hawk, such a gloomy outlook for the largest European economy scared investors. Moreover, he is also seen as a candidate to replace ECB President Mario Draghi later this year.

Despite the euro shrugged off the signals from the ECB official after a negative knee-jerk reaction, traders shouldn’t underestimate the economic risks in the region as the central bank won’t start the hiking cycle until it is firmly confident in the absence of a downside momentum in the economy.

In the context of monetary policy divergence, this means that the central banks’ policy still plays into the dollar’s hands despite the Federal Reserve takes a pause in tightening.