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The euro has not only returned to nearly 8-month highs but has also outpaced the U.S. dollar in the G10 currency race. EUR/USD quotes have been rising for five out of the last six trading days, but it’s unlikely that the bulls are this strong. The reality lies in the weakness of the bears. Thus, the August rally of the major currency pair is a story of a weak “American.”
The eurozone economy leaves much to be desired. Bloomberg experts predict that business activity data for August will show it is close to stagnation. The Bundesbank does not foresee a recession in Germany following the unexpected contraction of its GDP in the second quarter but notes that the recovery of the leading economy in the currency bloc will be extremely slow.
Meanwhile, unions are demanding salary increases of 7-19% over the next 12 months, with strikes and labor shortages serving as leverage. Wages rose by 4.2% and are likely to continue increasing. This will keep core inflation significantly above the 2% target and force the ECB to gradually normalize monetary policy. ING believes that market expectations for a 68 bps monetary expansion in 2024 are exaggerated. In reality, there is likely to be only one deposit rate cut, by 25 bps.
Despite the sell-offs in July and August, the U.S. dollar still appears very high, especially when considering the real effective exchange rate. The Fed is transitioning from tightening monetary policy with a subsequent plateau in the federal funds rate to easing it. Such periods are always negative for the U.S. currency.