Euro gains ground near four-month high on hopes of reducing the rate gap

Euro rose in European trade on Tuesday against a basket of major rivals, resuming gains and moving once again near four-month highs against the dollar on hopes of reducing the EU-US interest rate gap.

The European Central Bank will likely refrain from a rate cut at this week’s meeting, while the Federal Reserve is increasingly likely to cut rates both in September and November after less aggressive remarks by Fed Chair Powell.

Prices

The EUR/USD rose 0.1% today to $1.0899, with a session-high at $1.0884.

The pair lost 0.1% on Monday, the first loss in four days, away from four-month highs at $1.0922. 

The euro was hurt back then due to rising risk aversion after the failed assassination attempt on ex-US President Donald Trump.

The ECB

Later today, the European Central Bank will hold a policy meeting to discuss conditions and proper rate decisions, which will be issued tomorrow, with most analysts expecting no changes. 

The ECB cut first rates last June for the first time since 2016 after a long wave of rate hikes, however it refrained from any further moves. 

US Rates

Fed Chair Jerome Powell said in an earlier speech in Washington that latest consumer prices data bolsters confidence that inflation is returning to the 2% target sustainably, with three consecutive readings presenting better than expected results. 

Following the remarks, the odds of a 0.25% September rate cut by the Federal Reserve rose to a full 100% according to the Fedwatch tool, with a similar 100% likelihood of a rate cut in November. 

Rate Gap

The current interest rate gap between Europe and the US holds at 125 basis points in favor of the US, and will likely shrink in September, in turn boosting the euro against the dollar.