The euro is declining by more than 0.1% against the US dollar today, a reflection of previous gains that had taken it to its highest levels in more than ten days at the level of 1.07144.
The euro’s declines come despite more positive signs being shown by the region’s largest economy, with the highest levels of confidence in the business sector in Germany in about a year. However, more pessimism about the possibility of cutting interest rates in the US prevents the European currency from benefiting from positive surprises.
The return of the Eurozone economy to growth and expansion may encourage monetary policy makers to be patient about cutting the interest rate during the second half for fear of restarting inflation, and this may strengthen the silver lining of recording only two interest rate cuts at most through the rest of this year.
This optimism about the region’s economy’s ability to recover has pushed the yield on ten-year German bund to record the highest opening since last November.
This shift in expectations about the path of monetary policy, in addition to the return to life in economic activity, helps the yield gap between Treasuries and German bunds to shrink, and this would limit the impact of the sharp rise in yields in the US on the euro. While the 10-year yield gap is located near the lowest levels two weeks ago at 2.074%.
On the other hand, sentiment about the possibility of the Federal Reserve reducing interest rates in the second half of this year continues to decline, as the probability of a 25-basis point cut in June reached only 12.9% according to CME FedWatch Tool, which is the lowest since attention began to shift towards this month as the starting point for the path of monetary easing.
In today’s data, better-than-expected sentiment levels according to the Ifo Business Climate Index come as pessimism about the future of the economy continues to decline. While sentiment itself does not appear to be at its best, according to the Ifo survey for April, whether in the services, manufacturing, trade, or construction sectors.
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