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COMMENT-EUR/USD longs may be dismayed as Fed, ECB policy divergence may widen

EUR/USD traded higher Tuesday on the back of general dollar weakness, but it's hardly a sigh of relief for longs as Fed and ECB policies appear set to work against them.

Entrenchment of disinflation within the euro zone was reinforced Tuesday after inflation eased to near three-year lows as German March CPI and HICP rates fell sharply from February's levels.

The pricing data reinforces the case for the ECB to begin cutting rates before the Fed and possibly at a more aggressive pace.

Meanwhile U.S. Treasury yields (US2YT=RR), US10Y extended their recent rallies as investors continue to reduce the probability the Fed will cut as much as expected.

CME's FedWatch tool indicates the probability of a June cut at slightly above 60% https://tinyurl.com/bdf74mew, which is much lower than the near 75% indicated just one month ago.

The reduced expectations for Fed cuts has dramatically increased the dollar's yield advantage over the euro. German-U.S. spreads (US2DE2=RR) blew out to their widest since early January. Further widening could make EUR/USD rallies a rarity.

U.S. weekly claims, March ADP and payroll reports are now in focus. EUR/USD bulls hope results indicate weaker jobs markets, which could lead to increased probability for Fed cuts. Robust data may send EUR/USD towards 1.0500.

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