The Euro remained close to a three-month high against the US Dollar on Tuesday, with EUR/USD trading around 1.1671, just below the recent peak of 1.1711 reached on Friday [1]. The US Dollar has struggled to recover from last week’s sell-off, which was triggered by the US Treasury’s decision to increase buybacks of longer-dated government securities [1]. The US Dollar Index (DXY) hovered around 98.95 after briefly surpassing 99.00 earlier in the day [1]. ING’s Francesco Pesole noted that the Dollar is drawing some support from stabilizing long-dated US bond yields, with the bond market providing a cautious consolidation backdrop for the currency [2]. He referenced reports that the Treasury may use its account at the Fed (TGA) to fund buyback operations for long-dated debt, but ING’s rates team believes this would have a limited impact on the bond market [2].
Geopolitical developments also played a role, as Pakistan’s Interior Minister reported a “very positive and productive meeting” with Iranian President Masoud Pezeshkian, with Pakistan acting as a mediator between the US and Iran [1]. This diplomatic activity followed the US Treasury’s launch of “Operation Economic Outcast,” a broader sanctions campaign targeting Iranian government finances [1]. ING highlighted that ongoing US-Canada trade tensions and risks related to Iran sanctions are complicating the outlook for the Dollar, while any escalation in US-China trade frictions could further weaken the currency [2].
On the economic data front, the US ADP Employment Change four-week average rose to 11.75K from 9.5K previously [1]. Market participants are now awaiting the US Personal Consumption Expenditures (PCE) Price Index release on Wednesday for further inflation signals and clues about the Federal Reserve’s interest rate trajectory [1]. Attention will also turn to Fed Chairman Kevin Warsh’s speech at the Jackson Hole Symposium on Friday [1][2].
In the Eurozone, stronger-than-expected German economic data provided support for the Euro. Germany’s GDP grew by 0.3% in the second quarter, exceeding both the preliminary estimate and market expectations of 0.2%. On an annual basis, GDP expanded by 1%, beating the 0.9% forecast and accelerating from 0.7% previously [1]. The IFO Business Climate data also contributed positively [1]. Looking ahead, the Federal Reserve is widely expected to keep rates unchanged, while the European Central Bank (ECB) is seen as likely to raise borrowing costs in September [1]. ING’s baseline expectation is for the Dollar to consolidate into the Jackson Hole event, but the balance of risks remains skewed to the downside [2].
CONCLUSION
The Euro’s strength is underpinned by robust German economic data and diverging monetary policy expectations, while the US Dollar faces downside risks amid fiscal concerns, geopolitical tensions, and cautious bond market support. Market participants are closely watching upcoming US inflation data and central bank commentary for further direction. The overall outlook suggests continued consolidation for the Dollar, with risks tilted to the downside.