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The United States may see recession signals, but the euro zone secretly "recovers blood". Will the euro change against the US dollar?
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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange Platform]: The United States may have recession signals, but the euro zone secretly "recovered blood", will the euro against the US dollar change?". Hope it will be helpful to you! The original content is as follows:
On Tuesday (August 5), the euro fell slightly against the US dollar, and now trading around 1.1541, a drop of about 0.2%; the euro zone GDP achieved positive growth of 0.1% in the second quarter, better than expected zero growth. The www.xmh100.comprehensive PMI in July is expected to rebound to 51 to the expansion range, indicating that economic activity has gradually stabilized, and the economic resilience of the euro zone is providing solid support for the exchange rate; at the same time, the growth rate of the euro zone PPI is mild and controllable, providing space for the European Central Bank to maintain the current policy tone. In addition, the expected heated up of the US interest rate cuts to suppress the US dollar index, and jointly support the euro's fluctuation and strengthening.
The U.S. Department of Labor’s non-farm data is seriously lower than expected, and the risk aversion sentiment towards the recession has driven the influx of short-term bond buying, pushing up bond prices and lowering short-term U.S. Treasury yields. Concerns about future inflation have caused long-term bond prices to fall and yields to rise because higher yields are needed to hedge the risks of future inflation. Short-term yields decline, long-term bond yields rise, and rapid interest rate spreads make the curve steeper may become a signal of a recession in the United States.
The U.S. yield curve is getting steeper
The U.S. 10-year Treasury bond yield is 4.2%, almost returning to the level before the eve of "Liberation Day" (April 2). Since then, it has fallen rapidly to 3.85% due to risk aversion and implicit recession risks. It then turned around and soared to 4.6%. Fast forward to the last few weeks, and the tariffs have absolutely "restarted", but this time the impact is far less than before.
The concern for the future is upward pressure on inflation (even if it is strictly more like price increases than inflation increases).
Affected by tariffs, there is a high possibility that inflation will reach 4% at some time in the second half of 2025. Even if long-term yields choose not to worry about financing issues with fiscal deficits, they cannot www.xmh100.completely ignore 4% inflation. The key question is whether the 10-year Treasury yield can fall back to 4% (or lower) when inflation reaches 4%.
But there will be tensions considering the negative factors of inflation/deficits. The yield curve could get steeper in the case of a weaker economy (as indicated by last Friday’s employment report).
The 2/10-year yield curve is currently only steep at 50 basis points. This can easily reach a steepness of 100 basis points, and both ends of the curve will contribute.
The decline in front-end yields has made sense in the past few months (the 4% region looks high).
But for 10-year yields, although it may try to drop sharply, we believe that this trend will be questioned in the future price-rising environment. Ultimately, in the www.xmh100.coming months, there is a risk that 10-year yields are higher than current levels.
Eurozone economic growth strongly supports bullish interest rates
Eurozone economic data appears to be in a recovery trend www.xmh100.compared to the United States, which itself provides a reason for bullish euro interest rates.
"Liberation Day" dimmed the outlook, but the data has since continued to be better than expected. Not only soft data, last week's second-quarter GDP data achieved positive growth of 0.1%, better than expected zero growth.
Citi surprise index (characterizing data relative to expected performance) is now at its highest level in more than a year.
We will obtain PMI data from many European countries on Tuesday (August 5), which may continue this positive momentum. The stable outlook for euro interest rates is also reflected in volatility indicators.
The 3-month implied volatility of the 10-year euro bond yield is now at its lowest level since 2022 and remains on a strong downward trend.
The uncertainty ahead is also limited for short-term interest rates, especially www.xmh100.compared with US interest rates. Despite the significant decline in the correlation between European bonds and U.S. bond interest rates since Trump’s election, the development of the United States remains a key source of risk for our development prospects. For example, if the United States faces bullish interest rates, it is difficult for us to see the euro rate rise.
On the other hand, if inflation and issuance pressures push up U.S. Treasury yields again, that would help the 10-year euro swap rate break above 2.8% later this year.
Main focus: PMI data from European countries released later on Tuesday (August 5). At the same time, in view of the disappointment of the U.S. employment data released last week, the U.S. ISM service survey data will also attract much attention.
The above content is about "[XM Forex Platform]: The United States may have a recession signal, but the euro zone stealsIf you steal "recovery" and the euro will change against the US dollar? The entire content of " is carefully www.xmh100.compiled and edited by the editor of XM Forex. I hope it will be helpful to your transactions! Thank you for your support!
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