Euro Recovery May Be Limited by Rate Hike Expectations

The Eurozone's economic activity is showing signs of recovery, according to leading indicators such as Germany's IFO business climate index and the Purchasing Managers' Index (PMI). The index improved in July to 86.6, up from 85.7 in June, with expectations driving the increase.

This improvement echoes the increases seen in the Eurozone July PMI and ZEW index. Brown Brothers Harriman's Elias Haddad notes that this data reinforces the case for the European Central Bank (ECB) to resume raising rates in September.

However, Haddad argues that already-priced tightening and nearby technical resistance may limit further Euro upside. The swaps curve has priced in a 90% odds of a 25bps rate hike at the September 10 meeting, which suggests that EUR/USD may not see significant gains.