Weekly: FX – USD weakness to be temporary

by: Roy Teo

The EUR traded around the 1.32-1.33 for most of the week as data releases out of both the Eurozone and the US came in better than expected. The EUR came under some pressure after ECB chief economist Praet said that further rate cuts remain an option. However, better than expected data out of Germany and Italy pushed the EUR above 1.33. As EUR/USD continues to head higher, the options market premium to hedge further weakness in the EUR has also declined. However, we remain cautious in the EUR as short term interest rate differentials between the Eurozone and the US has eased, and we expect this trend to continue going forward as the ECB steps up forward guidance. Besides Eurozone Q2 GDP release next week, speeches from Fed officials will also be important drivers in the EUR. As we remain confident that growth in the US will accelerate in the coming months, we stick to our Q3 forecast of 1.25.