The Euro has extended its rebound against the US Dollar, with EUR/USD moving towards 1.1600, as European yields remain elevated and US Treasury yields stabilize following a recent spike, according to Danske Bank's research team [1]. The 10-year US Treasury yield dropped from an intraday high of 4.75% to 4.69%, contributing to the stabilization in the currency markets [1]. Danske Bank notes that markets are currently pricing in too many European Central Bank (ECB) rate hikes, suggesting there is scope for European rates to move lower in the future [1].
Recent economic data from Germany showed a positive surprise, with the ZEW economic sentiment index rising to 34.2 in August (consensus: 30.0, prior: 26.3), and the assessment of the current situation improving to -61.1 (consensus: -69.3, prior: -77.6). The current situation index is now nearly back to pre-war in Iran levels, though expectations remain somewhat subdued [1]. This data follows a series of upside growth surprises in the euro area, with growth increasingly supported by fiscal stimulus measures [1].
In the euro area, the final July Harmonized Index of Consumer Prices (HICP) inflation data is expected to confirm the flash estimate at 2.9% year-on-year for headline inflation and 2.5% year-on-year for core inflation [1]. On the US side, the market is awaiting the release of the Federal Open Market Committee (FOMC) July meeting minutes, which are anticipated to provide more detailed insights into the committee's policy stance. Three FOMC participants voted in favor of a rate hike at the last meeting, and several others have indicated a willingness to support a hike if justified by incoming data [1].
Overall, while risk sentiment remains cautious, especially in Asia, the stabilization of US yields and reassessment of ECB rate hike expectations are supporting the Euro's recovery against the US Dollar [1].
CONCLUSION
The Euro's rebound is being driven by stabilizing US yields, positive euro area economic data, and a reassessment of ECB rate hike expectations. Market participants are closely watching upcoming inflation data and the FOMC minutes for further direction. The overall market sentiment is cautiously optimistic, with medium-term implications for both European and US rates.