(Bloomberg) -- The euro inched toward its highest level against the dollar this year, amid anticipation the Federal Reserve will cut interest-rates by more than the European Central Bank in the coming months.
The single currency rose as much as 0.3% to $1.1029, the strongest level since Jan. 2, as markets awaited US inflation data for further evidence the Fed will likely begin easing policy next month.
Money markets are currently pricing over 100 basis points of cuts in the US by December, compared to 70 basis points in the euro area. While the ECB has already lowered rates by a quarter point in June, traders see a risk of the Fed ultimately being more aggressive on easing, possibly delivering a half-point reduction in September.
This is “the start of a longer-lasting upward trend” for the euro, said Franceso Pesole, a FX strategist at ING. “We target a move to $1.12 in the near term on the back of a tighter rate spread and stabilizing risk sentiment.”
The euro has gained around 2% against the greenback since the start of August, after a weaker than anticipated July US jobs report saw traders ramp up bets on Fed rate cuts. It’s now approaching this year’s high at $1.1054.
Still, not all strategists are as convinced the market pricing on central bank cycles will hold.
Sonja Marten, head of FX and monetary policy research at DZ Bank, sees little likelihood of a half-point cut from the Fed in September and says there’s no fundamental reason for the euro to rise either because the German economy is weak.
“Investors are very quick to jump on the bandwagon of one or two better or worse than expected data releases,” she said. “This has led markets down the wrong path on numerous occasions this year.”
(Updates to add commentary from DZ Bank.)
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