The euro advanced against the dollar on Wednesday as growing expectations for further European Central Bank tightening countered reduced odds of a Federal Reserve rate hike.
The EUR/USD pair rose 0.3% to 1.0850, extending gains after U.S. private payrolls data for May fell short of forecasts, reinforcing concerns over the U.S. labor market. The ADP National Employment Report showed private employers added 152,000 jobs last month, below the 175,000 expected by economists polled by Reuters.
The softer U.S. jobs data reduced market expectations for a Fed rate hike at the June 12-13 policy meeting. Traders now assign a roughly 20% probability to a 25-basis-point increase, down from about 30% a week ago, according to CME Group’s FedWatch tool. The dollar index, which tracks the greenback against six major peers, declined 0.2% to 104.10.
In contrast, the ECB’s hawkish stance continued to support the euro. ECB President Christine Lagarde reiterated last week that inflation remains too high and that borrowing costs may need to stay elevated for longer. Money markets are pricing in around 50 basis points of ECB rate hikes by the end of the year, with the first increase expected in July.
Analysts at ING noted that the divergence between the Fed and ECB policy outlooks is driving the EUR/USD move. "The market is increasingly betting on the ECB staying the course on tightening while the Fed’s path looks more uncertain," they said in a note.
The euro’s gains were also supported by a rise in German bund yields, which climbed to their highest level since early March, reflecting growing confidence in the ECB’s commitment to fighting inflation.
Looking ahead, investors will monitor U.S. weekly jobless claims data due Thursday for further signals on labor market strength, as well as upcoming U.S. consumer price inflation figures on Friday, which could influence Fed policy expectations.
