The euro is slipping fast, dragged down by traders who are betting that interest rates in Europe and the US will continue to head in opposite directions. Yesterday, the European Central Bank (ECB) cut rates, and inflation data from Germany and France today reinforced the idea that more rate cuts are coming.
Meanwhile, the US Federal Reserve left its rates unchanged on Wednesday, making the dollar the more attractive choice for investors. With traders fully pricing in three more rate cuts by the ECB before the end of the year, some forecasters see the euro hitting parity with the dollar. That’s right—1 euro could soon equal 1 dollar, a situation that hasn’t been seen in about three years.
ECB cuts rates, euro sinks while traders bet on parity
Eurozone growth stagnated in the fourth quarter, according to the data released today. In contrast, the US economy is still growing, giving Chair Powell little reason to follow President Lagarde’s lead.
The euro hit $1.0365 on Friday, continuing its fall after dropping to $1.0178 earlier this month, its lowest point in over two years. It had briefly rebounded when Trump didn’t immediately place tariffs on Europe, but that relief didn’t last long.
German bunds (government bonds) rallied after the ECB rate cut, with two-year yields dropping 8 basis points to 2.13%, the lowest they’ve been in four weeks.
Data from the Depository Trust & Clearing Corporation (DTCC) shows that the number of options contracts targeting a euro-dollar parity doubled in January compared to December. Meanwhile, the premium for hedging against short-term euro weakness has doubled since Wednesday.
US Treasury yields rise as Fed holds firm
Across the Atlantic, US Treasury yields edged higher on Friday as traders awaited key inflation data. The 10-year yield rose by more than 2 basis points to 4.533%, and the 2-year yield climbed to 4.209%. Higher yields mean there’s a lot of confidence in the US economy, which makes dollar-denominated assets more attractive to investors.
At the center of attention was the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, which was scheduled for release in a few hours. Personal spending and employment cost data were also on the docket, with investors closely monitoring any surprises that could affect future rate decisions.
On Thursday, the US economy showed signs of slowing when fourth-quarter GDP growth came in at 2.3%, lower than the 2.5% expected by economists surveyed by Dow Jones. Still, the Fed kept rates in the 4.25%-4.50% range, resisting all pressure from Trump to cut rates.
Fed Chair Jerome Powell was clear about the central bank’s priorities, saying, “We’ll need to see real progress on inflation or some weakness in the labor market before we consider making adjustments.”
Meanwhile, on Thursday, President Trump confirmed that 25% tariffs on Canada and Mexico will go into effect on February 1. “We’ll really have to do that because we have very big deficits with those countries,” he said.
Markets are now watching closely to see if Europe is next on Trump’s list of tariff targets.
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Source: https://www.cryptopolitan.com/euro-takes-a-hit-as-ecb-and-fed-rate-diverge/