Euro sharpens decline to two-month trough on the interest rate gap

Euro Performance Declines

Euro declined in European trade on Tuesday against a basket of major rivals, sharpening losses for the second straight day against the dollar and plumbing a two-month trough on concerns about the US-Eurozone interest rate gap.

Market Sentiment

Markets are now convinced of the possibility that the European Central Bank will cut interest rates in June, with traders awaiting important European inflation data later today and tomorrow to have a better picture.

EUR/USD

• EUR/USD fell 0.2% to 1.0725, the lowest since February 14, with a session-high at 1.0744, after losing 0.4% on Monday, the fourth loss in five days following strong US manufacturing data.

Interest Rate Gap

The current US-Europe interest rate gap stands at 100 basis points, the lowest since May 2022, and is expected to expand to 125 basis points next June if the ECB went ahead with a rate cut while the Federal Reserve abstained.

European Rates

• Recent bearish remarks by several ECB policymakers bolstered the case for an early interest rate cut in June, with markets estimating a total of 90 basis points of rate cuts this year.

Inflation Data

Later today, consumer prices data for Germany and other European countries will be released, while tomorrow, data for the whole euro zone will be released.

Euro Performance Estimates

Credit Agricole’s forex analysts expect the dollar to outperform the euro relatively, as the euro is exposed to potential downward inflationary shocks this week.