The euro was headed for its longest winning streak against the dollar since 2004 as investors bet the Federal Reserve is close to ending its campaign of interest-rate hikes.
(Bloomberg) — The euro was headed for its longest winning streak against the dollar since 2004 as investors bet the Federal Reserve is close to ending its campaign of interest-rate hikes.
The common currency rose as much as 0.4% to $1.1276 on Tuesday, extending gains into a ninth day and reaching the strongest level since February 2022. The pair has jumped 4% in less than two weeks, bringing its year-to-date advance to 5.1%.
Investors are selling the greenback on the view that the Fed may soon wrap up its tightening cycle, with a hike in July increasingly seen as the last one. The Bloomberg Dollar Spot Index fell to a 15-month low last week after data showed US inflation cooled more than expected, dragging down US Treasury yields.
“The two-year yield spread has continued moving in favor of the euro,” said Roberto Cobo Garcia, head of G10 FX strategy at Banco Bilbao Vizcaya Argentaria SA in Madrid. “The move in yields alongside markets complacency and the positive evolution of equity markets, help to explain the bullish move in the pair.”
Valentin Marinov, the head of G-10 FX research and strategy at Credit Agricole CIB, said recent euro gains have also been supported by companies buying the currency, with the pace of corporate purchases hitting the highest in a month.
But at current levels, some strategists say the rally may not last longer. While money markets still price two more quarter-point interest-rate hikes by the European Central Bank this year, recent communication from the central bank has been dovish.
ECB Governing Council member Klaas Knot said on Tuesday monetary tightening beyond next week’s meeting is anything but guaranteed — suggesting officials could soon pause their unprecedented string of interest-rate hikes.
“The euro is close to peaking,” said Geoff Yu, senior FX strategist at Bank of New York Mellon. “If you look at euro specific aspects it’s hard to find anything positive on the euro apart from positioning adjustments.”
On a technical basis, the euro is overbought after rising more than 18% since the lows reached in September when it fell below parity with the dollar. It’s also at levels associated with imminent pullbacks.
Options gauges, however, point to further gains, with euro short-term bullish sentiment at the strongest level since February 2022, while one-month options bets are close to turning bullish for the first time in 17 months.
Hedge funds are also optimistic, having added options exposure that pays out if the euro strengthens to $1.15 over the next one to three months, according to FX traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.
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