Dollar Strength Drives EUR/USD Lower as Policy Gap Widens
The EUR/USD pair is experiencing significant downward pressure due to the widening gap between interest rates set by the Federal Reserve and the European Central Bank. The Fed has raised its federal funds target to a range of 3.75% to 4.00%, while the ECB has increased its deposit rate to 2.50%. This difference in policy rates is creating a strong incentive for investors to hold dollars over euros, driving down the value of the euro.
The latest economic data from the US, including the composite PMI jumping to 58.4 and input costs rising at the fastest pace since October 2022, has reinforced expectations of further rate hikes by the Fed in October. This has led to a sharp increase in the 10-year Treasury yield, with the 2-year yield reaching a new cycle high.
Meanwhile, the euro area is experiencing slower growth, with the ECB's own projections indicating 0.9% expansion this year and 1.4% next year. The contrast between the two economies has created a significant policy gap in favor of the dollar, driving down the value of the euro against the US currency.