By: Editorial Team, StoneX Media
Currency markets are increasingly shaped by a widening gap between the world's two most influential central banks. The Federal Reserve has shown no urgency to ease policy, while the European Central Bank is growing more hesitant to tighten further. That divergence, not any single data release, is now the dominant force behind the U.S. dollar's advantage over the euro. With Federal Reserve meeting minutes on the calendar and the European Central Bank's next move in question, the policy gap between them has become the central story for EUR/USD.
Fawad Razaqzada, Market Analyst at FOREX.com, has spent more than 12 years tracking currency markets through the lens of macroeconomics, technical analysis and price action. His coverage sits at the intersection of central bank policy and price behavior, the exact dynamic now driving the split between the Federal Reserve and the European Central Bank.
The Federal Reserve remains the primary anchor for dollar strength, and recent U.S. data has done little to change that. Razaqzada notes that "Last week's disappointing U.S. jobs report wasn't weak enough to significantly change expectations for Federal Reserve policy", a sign that the labor market would need to weaken considerably further before the Federal Reserve shifts course. The latest ISM Services PMI reinforced that picture, showing the U.S. economy still expanding at a healthy pace without stoking fresh inflation concerns. Attention now turns to Wednesday's FOMC minutes, where any hint of continued tightening could extend the dollar's advantage. As Razaqzada puts it, "If they showed any preferences to further tightening, that could provide another boost for the dollar".
"Markets are becoming less convinced that the European Central Bank will raise rates again in September", and that shift in expectations is doing more to shape EUR/USD than any single piece of eurozone data. Germany's industrial production rose 0.9% in May on stronger manufacturing and construction activity, a rare bright spot for the currency bloc. The gain, however, failed to provide any support for the euro. A single positive release is not enough to change the bigger picture, particularly with the European Central Bank still expected to hold a cautious tone on inflation. As Razaqzada explains, "the EUR/USD is being driven mainly by the dollar side of the equation right now".
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--- Written by Gus Farrow, Senior Manager, StoneX Media
--- Expert: Fawad Razaqzada, Market Analyst, FOREX.com
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