Nov 17, 2023

The recent weakness in the US dollar has the euro at the 1.09 level. 

eurusd-chart

EURUSD – Daily Chart

EURUSD is trading around the 1.085 level. Above 1.090, there is resistance, and the next target is 1.1225. 

The euro’s exchange rate against the US dollar has weakened over the last year. A more aggressive Federal Reserve has outweighed the European Central Bank, which was slower to act on interest rate hikes. The European economy has also been much weaker in terms of growth. Investors are considering that they may have overdone their dollar bullish trades.  

ECB President Christine Lagarde has been sounding the alarm for EU banks looking to raise capital. She said banks may suffer significant losses if they need to sell their bond holdings. 

At the European Systemic Risk Board conference, she said, “EU banks’ holdings of fixed-income securities could be marked down quite significantly, should they need to be sold. “ 

The European Central Bank recently ended its longest-ever series of interest rate hikes. In October, the central bank left its interest rate unchanged at 4%. The latest data show inflation slowly declining towards the target of 2%. 

The EU unemployment rate was 6% in September 2023, which is stable compared to August 2023 and down from 6.1% in September 2022. However, that is a much larger number than the unemployment rate in the US and UK. 

The euro surged this week as US inflation softened, but the key now will be 10-year treasury yields. In addition to Fed Chair Jerome Powell, other Fed officials have also suggested that if yields remain elevated, the Fed would be able to skip rate hikes at future meetings.  

At Thursday’s market open, US 10-year treasury yields were 1.5% lower, continuing their decline. Further losses would support the euro. 

Kathleen O’Neill Paese, interim president of the St. Louis Fed, said on Thursday that she supported the Fed’s decision to hold rates firm at November’s meeting due to “the tightening of financial and credit conditions that have occurred over the past two or three months.” 

The EUR v USD exchange rate still has room to move higher if US yields fall, but if they fall too far below the Fed’s intentions, it could open up the potential for rate hikes at future meetings.

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