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Euro Tumbles to New Lows Amid Rising Dollar Strength and Divergent Central Bank Policies

Euro Tumbles to New Lows Amid Rising Dollar Strength and Divergent Central Bank Policies

The foreign exchange market has been dominated by a strong US dollar, pushing the euro to lows not seen since November. This financial narrative discloses a tale of diverging paths between the European and American central banks, each maneuvering through different economic signals.

Euro Loses Grip as ECB and Fed Policies Diverge

EUR/USD Hits Multi-Month Low

The EUR/USD pair has not fared any better, plunging into territory last charted in the closing months of the previous year. While technical indicators suggest a severely oversold euro, investors appear hesitant to wager on a resurgence given the starkly different directions the ECB and the Federal Reserve are headed.

The latest assembly of the ECB maintained rate levels but President Christine Lagarde’s comments did little to dissuade market expectations of an impending rate decrease. This potential shift comes amidst tepid inflation and sluggish economic growth within the Eurozone.

Inflation and Growth – A Divided Atlantic

In the US, the economic landscape paints a different picture. The strong employment data coupled with an increase in inflation readings lay the groundwork for a relatively hawkish stance from the Fed.

Prominent Fed representatives petal back expectations of a cut to the policy rate, in sharp contrast to the ECB’s signaling towards reduced rates. These polar approaches amplify the dollar’s value against an already weakening euro.

GBP/USD Struggles Under Dollar’s Dominance

GBP/USD Faces Downward Pressure

The British Pound has not been immune to the dollar’s growing might, with the GBP/USD pair descending past the 1.2500 landmark after an upbeat revision in the UK’s GDP and industrial growth failed to offset the greenback’s rally. The geopolitical strife and the looming anticipation of steadfast US monetary policy have only compounded the pressure on the sterling.

Despite slight respite Thursday, the pair persisted in its four-month low in the wake of assertive US dollar demand. However, a slump in the EUR/GBP exchange rate potentially buffers the fall, as capital appears to have fled from the euro to the sterling.

Euro Tumbles to New Lows Amid Rising Dollar Strength and Divergent Central Bank Policies

BoE’s Stance Versus ECB’s Anticipated Rate Cut

The contrasting views of central banks provide a backdrop to this currency drama. Bank of England policymaker Megan Greene signaled that any interest rate cuts in the UK seem distant, whereas the European Central Bank is largely anticipated to cut rates come June. These contrasting approaches between the BoE and the ECB are instrumental in sculpting the dynamics between the respective currencies against the dollar.

UK Economy Shows Growth in Manufacturing Sector

MonthGDP GrowthStock Market ReactionCurrency Exchange Rate
February0.1%FTSE 100 rose 1.4%Sterling down 0.7%

According to the Office for National Statistics, the UK economy experienced growth for the second consecutive month in February, primarily fueled by an expansion in the manufacturing sector. This positive momentum has raised optimism about the UK’s recovery from a technical recession.

The Gross Domestic Product (GDP) saw a 0.1% increase between January and February. Following this announcement, the benchmark FTSE 100 index surged by 1.4%, potentially reaching a new record high. Concurrently, the value of Sterling depreciated by 0.7% against the dollar, standing at $1.2469 during early afternoon trading in London, attributed to a general strengthening of the dollar.

This growth in February indicates a higher probability that the UK economy as a whole expanded in the first quarter, signaling the potential end of the technical recession that began in late 2023 due to two successive quarters of negative growth.

Market Outlook

No significant economic data is set to be released from the US today, but the market sentiment tilting toward a safe-haven could challenge the pound’s ability to maintain current levels against the dollar.

Investors and traders brace for this weekend with a watchful eye on global tensions and central bank narratives that could further fortify the dollar’s position.

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Author

  • Phyllis Wangui

    Phyllis Wangui is a Financial Analyst and News Editor with qualifications in accounting and economics. She has over 20 years of banking and accounting experience, during which she has gained extensive knowledge of the forex, stock news, stock market, forex analysis, cryptos and foreign exchange industries. Phyllis is an avid commentator on these topics and loves to share her insights with others through financial publications and social media platforms.