The euro edged slightly higher against the US dollar, trading around 1.1610 during the Asian session on Thursday, yet its overall outlook remains clouded with significant uncertainty.
The single currency is grappling with pressures from multiple fronts, including surging energy prices driven by the Middle East crisis and the uncertain outcome of the European Central Bank's policy meeting next week where interest rate hikes may be discussed. Concurrently, markets are awaiting the release of the US non-farm payrolls report for May on Friday.
Pressures on the Euro: Energy Costs and Policy Uncertainty
The euro is currently under broad pressure from several directions, casting a shadow over its near-term prospects. The Middle East crisis has pushed global energy prices higher, worsening the trade terms for the eurozone as an economy heavily reliant on oil imports. This leads to increased import costs without a commensurate rise in export revenues. In contrast, the United States, as a net energy exporter, is less affected, which reinforces the relative strength of the US dollar and diminishes the euro's appeal.
The eurozone's harmonized index of consumer prices rose by 3.2% year-on-year in May, with the core index up 2.5%, both exceeding previous levels and surpassing the ECB's 2% inflation target. The persistence of core inflation indicates underlying price pressures remain.
However, investors remain notably divided on whether the ECB will hike rates next week, as weakening growth momentum forces the central bank to proceed cautiously with any policy tightening.
Policy Outlook: ECB May Signal Hawkish Stance
Given persistent inflation pressures, the European Central Bank is highly likely to engage in in-depth discussions about tightening policy at its meeting next week. It may also signal a more hawkish stance, such as by raising its inflation forecasts, lowering growth projections, or clearly hinting at the possibility of future rate hikes.
This would provide some support for the euro. If the ECB offers clear guidance on rate increases, the euro could stage a rebound against the dollar, testing key resistance levels.
Nonetheless, hawkish signals would struggle to fully offset the pressures from elevated energy prices and growth concerns in the short term. Persistently high oil prices erode the euro's attractiveness, while rate hikes could further dampen already weak economic activity. Consequently, any boost for the euro is likely to be temporary and limited in scope.
Dollar Holds Firm as Markets Await Jobs Data
The US dollar index retreated slightly to around 99.45 on Thursday but remained close to its eight-and-a-half-week high of 99.55. Against a backdrop where the US and Iran are struggling to reach an agreement, with Tehran stating talks have made "no substantial progress" and former President Trump suggesting a deal might come "this weekend," market worries over the Middle East situation persist, underpinning safe-haven demand for the dollar.
Looking ahead, investor focus is squarely on Friday's US non-farm payrolls report for May. The better-than-expected ADP employment data has set a positive tone for the official figures.
A strong jobs report would reinforce expectations that the Federal Reserve will maintain high interest rates or even hike within the year, potentially pushing the dollar index above 99.55. Conversely, a disappointing report could trigger a short-term pullback in the dollar. Ahead of the data, the index is likely to consolidate within a range of 99.30 to 99.55.
Institutional Views
BNP Paribas anticipates eurozone GDP growth will slow from 1.5% in 2025 to 1.0% in 2026, but believes economic activity can withstand energy shocks thanks to investments in defense, artificial intelligence, and electrification. It forecasts inflation will rebound to 3.0% in 2026 and rise to 3.3% in 2027. The ECB is expected to implement two 25-basis-point rate hikes in 2026, with the first in June, lifting the deposit rate to 2.5%. BNP Paribas predicts the euro will reach 1.21 against the dollar in the fourth quarter of 2026 and 1.25 in Q4 2027, primarily driven by an ongoing trend of global diversification away from the US dollar, which should lead to dollar depreciation.
HSBC believes the euro lacks a clear directional trend against the dollar in the near term. Until the Middle East impasse finds a clear resolution, the dollar is likely to remain range-bound. While interest rate differentials, supported by the Fed's relatively hawkish stance and partially priced-in ECB hike expectations, will underpin the dollar, they are insufficient to trigger a sustained rally. Regarding the euro, HSBC notes that markets have priced in roughly 60 basis points of ECB tightening this year. However, with increasing signs of weakness in eurozone activity, the ECB is unlikely to deliver a more hawkish path than currently expected, leaving limited room for independent euro strength and skewing risks to the downside.
UBS suggests the euro is likely to remain in a range-bound pattern against the dollar, with its upside capped. The core reason is the ongoing policy divergence between central banks: the Fed is relatively more hawkish, emphasizing "higher for longer" rates, while the ECB faces a more fragile eurozone recovery. Additionally, the ongoing conflict in Ukraine continues to impact Europe's energy security and industrial competitiveness, and concerns about China's growth add to uncertainty for the eurozone's outlook. UBS advises a strategy focused on risk management within the range, avoiding chasing euro rallies.
On the daily chart, the euro has exhibited a broad, volatile trading pattern over a larger cycle. The current price of 1.1610 sits below the 20-day and 50-day moving averages. Previous highs at 1.2081 and the secondary high at 1.1848 are trending lower, with resistance above at 1.1848 and key support below near the recent low of 1.1410.
The MACD indicator shows its lines slightly below the zero line with minimal green bars, indicating a slight short-term bearish advantage. The RSI is at 43.23, within a neutral range, showing no clear overbought or oversold conditions. The short-term trend remains range-bound without a clear directional breakout, awaiting a price move beyond key support or resistance levels to establish a trend.
As of 14:35 Beijing Time, the euro was trading at 1.1612/13 against the US dollar.
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