Euro under pressure from bonds and Fed repricing

Strategists from OCBC, Sim Moh Siong and Christopher Wong, note that the euro is facing pressure from multiple directions. European bond market turbulence has increased expectations that the European Central Bank (ECB) may adopt a more dovish stance. Meanwhile, the US dollar is finding some support as US economic resilience pushes yields higher.

The euro remains under pressure due to the turmoil in European bond markets, which is shaping expectations for a more cautious ECB. However, the safe-haven demand that boosted the Swiss franc last week has begun to fade.

Markets are currently pricing in slightly more than three Federal Reserve rate hikes over the next year, a trajectory that OCBC views as overly aggressive. Recent labor market data suggests softer hiring and moderating wage growth, indicating that inflation pressures from the labor market are easing. If upcoming inflation data confirms this trend, markets may scale back expectations for further tightening.

OCBC maintains that EUR/USD remains a key focus. Unless European bond market volatility escalates significantly, the firm anticipates a moderate rather than aggressive US dollar rally into year-end.

Expectations for an October Fed rate hike have decreased sharply after several Fed officials signaled little urgency to tighten policy further. Recent comments from senior Fed officials have led markets to favor a pause in October, with any further tightening likely deferred until later in the year.