Euro nears year-high on Fed rate cut expectations

The euro edged closer to its highest level against the US dollar this year, driven by expectations that the Federal Reserve will cut interest rates more aggressively than the European Central Bank (ECB), in the coming months.

The single currency rose by as much as 0.3 per cent to $1.1029, its strongest level since January 2, as markets awaited US inflation data for further signs that the Fed might begin easing policy next month.

Money markets are currently pricing in over 100 basis points of rate cuts in the US by December, compared to 70 basis points in the euro area.

Although the ECB already lowered rates by a quarter point in June, traders anticipate that the Fed could be more aggressive, potentially delivering a half-point reduction in September.

“This is the start of a longer-lasting upward trend for the euro,” said Francesco Pesole, an FX strategist at ING, who predicts the euro could reach $1.12 in the near term, driven by a tighter rate spread and stabilising risk sentiment.

The euro has gained around 2 per cent against the dollar since the start of August, buoyed by a weaker-than-expected US jobs report for July, which increased market bets on Fed rate cuts. The euro is now approaching its 2024 high of $1.1054.

Attribution: Bloomberg

Subediting: Y.Yasser