Euro Defies Slowdown: Strengthening Against Dollar Amid Shifting Rate Expectations

The euro has strengthened against the US dollar despite slower growth in the eurozone economy, according to an analysis by BNP Paribas.

This unexpected development can be attributed to shifting interest rate expectations between the European Central Bank (ECB) and the Federal Reserve. The market is pricing in a slower pace of rate cuts from the ECB compared to earlier forecasts, while softer US economic indicators have raised expectations that the Fed may ease policy sooner than previously anticipated.

The EUR/USD pair has edged higher in recent sessions, trading near 1.1020 as of mid-August 2024, up from around 1.0850 a month earlier. This move has been driven partly by a broader dollar weakness following weaker-than-expected US employment and manufacturing data.

BNP Paribas analysts caution that the euro's gains may be limited if eurozone growth continues to deteriorate. They point to a widening divergence between services and manufacturing activity in the bloc, with the services sector holding up better while factory output contracts.