The euro witnessed a decline during European trading on Thursday, marking its fourth consecutive loss against the dollar and reaching a four-week low. This descent was fueled by renewed apprehensions surrounding the expanding policy disparity between the United States and Europe.
The likelihood of a forthcoming interest rate hike by the European Central Bank (ECB) in the following month dwindled, whereas the probability of a 0.25% increase in US interest rates by the Federal Reserve in September gained traction.
The EUR/USD pair experienced a 0.2% dip, settling at 1.0919, the lowest point since July 7, after touching a session peak of 1.0949. This follows a 0.4% loss on Wednesday, constituting a third successive decline prompted by robust US private sector employment data.
European Monetary Landscape
The probability of a 0.25% interest rate hike by the ECB in the meeting scheduled for September 14 has diminished, coinciding with a shift in tone following the ECB’s policy meeting last week. ECB President Christine Lagarde emphasized that any adjustments to interest rates in September would be contingent solely upon data-driven considerations.
Recent data from Europe unveiled that consumer prices for July experienced their slowest increase in eighteen months, thus alleviating inflationary pressures faced by ECB policymakers.
Interest Rate Dynamics in the US
Conversely, recent data from the United States has underscored the resilience of the world’s largest economy, particularly through robust labor statistics that could potentially compel the Federal Reserve to pursue further interest rate hikes.
Private sector data from the US unveiled a surge in employment gains for July, surpassing expectations and bolstering the prospects of a 0.25% rate hike in September.
Investor Focus and Interest Rate Gap
Currently, market participants await pivotal labor data, including unemployment claims, along with the highly significant payrolls report scheduled for release tomorrow.
The existing divergence in interest rates between Europe and the United States stands at 125 basis points, the narrowest gap since May 2022. This gap could potentially widen to 150 basis points in September if the ECB refrains from executing a rate hike while the Federal Reserve introduces a new one.