Euro back above 1.10

Published on 24.04.2023 15:27

The Euro continues to hover around a 10-month high against the greenback, once again breaking through the 1.10 mark and the gains look set to continue this week this week if congressional drama related to the U.S. debt ceiling puts pressure on the US dollar or if European Central Bank (ECB) policymakers are forced to position themselves for a possible 50 basis point rate hike in the face of strong economic data.

Europe's single currency was one of the better performers last week after its ground in the face of a rebounding Dollar including on Friday when S&P Global PMI surveys of the manufacturing and services sectors offered further signs of resilience in the business sector throughout the Eurozone.

"The pair is currently testing the top of this year’s trading range between 1.0500 and 1.1000. We expect the pair to break out to the upside and move back closer to pre-Ukraine conflict levels," says Lee Hardman, a currency analyst at MUFG.

"The resilience of the euro-zone economy keeps pressure on the ECB to tighten policy further. ECB officials have left the door open to another larger 50bps hike next month," he added.

The other news to watch with regards to the direction of the Euro is coming out of the US and includes Thursday's release of first-quarter GDP figures, as well as Friday's publication of the Employment Cost Index and Core Personal Consumption Expenditures Price Index for the same period.

All of these numbers will be crucial for determining whether the Federal Reserve will lift its interest rate further in the months ahead after raising its benchmark for borrowing costs to 5% last month while leaving forecasts for only one or two more increases this year unchanged.

However, much more important for the greenback may well be whether or not there is any pre-emptive selling of the Dollar so as to hedge the risks associated with uncertainty over how much longer the U.S. government can continue to pay its bills for without raising the statutory debt limit.

The US could face an unprecedented default on its obligations as soon as early June if Congress does not act to lift the debt limit, a Washington thinktank said on Wednesday.

“Policymakers have an opportunity now to inject certainty into the US and global economy by beginning, in earnest, bipartisan negotiations around our nation’s fiscal health and taking action to uphold the full faith and credit of the United States well before the X-date” said Shai Akabas, director of economic policy from the Bipartisan Policy Center (BPC).