The dovish ECB message last week was not enough to stop the appreciation of the euro, and the Fed’s commitment to another rate hike this year has failed to support the US dollar. Currency markets seem to refuse to dance to the tune of the central banks. Admittedly, the euro is an attractive currency from a purely valuation perspective while the US dollar is rather expensive. But the interest-rate differential is a substantial argument in favour of the US dollar. The same applies to policy divergence as the US Fed is in a much more comfortable position to tighten monetary policy than the ECB. Currency markets seem to count on – prematurely - a convergence of monetary policy between the US and the eurozone.
We see mainly two explanations for currency markets expecting a convergence: on the one hand, surprisingly positive economic data coming from the eurozone and, on the other, frequent disappointments when it comes to data reports from the US. The fact that eurozone economies are currently by far not running at full speed is thereby being ignored just like the emerging capacity constraints in the US. We expect this to change in the coming month, driving EUR/USD lower. Since the difference between eurozone and US economic data surprises has peaked, an imminent correction in EUR/USD is becoming increasingly likely.