Forex: Euro Extends Decline, Sterling Pares Gains
The Euro extended decline against the US dollar on Tuesday while the sterling paired gain in the forex market. With global uncertainties, the demand for US dollar has continued to increase on the back of tariffs responses from countries targeted by the United State President Donald Trump.
The Russia-Ukraine peace talks could boost Euro area numbers, and reduce U.S tariff threat in a play along game with Trump administration.
In a note, ING said should Russia and Ukraine ultimately reach a peace deal, the dollar is probably due another moderate correction. “…but for now, markets are lacking tangible bearish USD drivers and we think the dollar could keep rebounding today”.
The euro extended its decline to $1.45 as traders weighed the implications of increased defense spending on inflation and interest rates.
With the US signaling plans to scale back support for Ukraine and pursuing negotiations with Russia to end the war, European governments convened in Paris to discuss alternative support strategies.
However, the informal meeting concluded without concrete measures. Strengthening defense and aiding Ukraine could cost Europe’s major economies an estimated $3.1 trillion over the next decade.
On the monetary policy front, the European Central Bank is expected to cut its deposit rate by 25 basis points at each of the next three meetings, bringing it down from the current 2.75%.
Analysts’ forecasts increasingly suggest rates could fall below 2% by 2026.
The British pound initially strengthened but later pared some gains to settle at $1.26 as traders assessed a mixed labor market report. Wage growth accelerated in the final three months of 2024, rising in real terms when adjusted for inflation.
Additionally, the unemployment rate unexpectedly held steady at 4.4%, though vacancies and payrolled employees declined. The data reinforced the Bank of England’s cautious approach to rate cuts, with Governor Andrew Bailey citing wage growth as a key factor keeping services inflation elevated.
Traders now turn their attention to CPI and PPI figures due Wednesday for further insight into inflation trends. Meanwhile, investors are also closely monitoring developments in the Ukraine conflict, particularly after Trump initiated peace talks with Russia and UK Prime Minister Keir Starmer became the first European leader to propose sending peacekeeping troops.
Today, markets will remain focused on any developments on the US-Russia bilateral talks on Ukraine, but barring a major breakthrough, the optimistic push and relative upbeat risk sentiment may stall or fade in the next couple of days and the dollar can continue to recover some ground, according to ING. #Forex: Euro Extends Decline, Sterling Pares Gains#
