FX Comment: US dollar rallies after Greek deal

by: Georgette Boele

  • EUR/USD had a short-lived rally to 1.12…
  • …and US dollar has strengthened after Greek deal with creditors

The first reaction after news hit the market that there was between Greece and its creditors, EUR/USD moved to 1.12. Since then it has come under pressure. Why?

For a start, financial markets already anticipated a possible deal in the making. As a result, EUR/USD moved above 1.12 on Friday. However, afterwards comments from Fed’s Yellen that the Fed will start hiking rates this year weighed on EUR/USD.

Moreover, today it has been mainly a US dollar rally rather than the Greek deal driving the market. Since Friday’s close, the US dollar has strengthened across the board. This mainly reflects the following. The improvement in investor sentiment following the deal has resulted in a refocus on monetary policy and growth divergences across the Atlantic and between the US and other countries. The weakness in safe-haven currencies such as the Japanese yen and Swiss franc reflect the same dynamics.

Going forward, we expect EUR/USD to test parity in the coming months mainly because of the monetary policy divergence between the US and eurozone. This is because the US dollar is currently driven by cyclical forces, such as the relative economic performance and the outlook on the Fed.