The euro edged higher against the U.S. dollar in European trading Friday, snapping a three-day losing streak as traders covered short positions following the currency’s recent decline to two-week lows. The modest rebound came despite growing expectations for monetary policy divergence between the Federal Reserve and European Central Bank, which continues to weigh on the common currency’s medium-term outlook.
Market sentiment remains bearish on the euro as investors price in a near-certain ECB rate cut in June, while the Fed appears set to maintain its higher-for-longer stance. This growing interest rate differential has pressured the euro, putting it on track for its second consecutive weekly decline. Analysts note the currency’s Friday bounce likely represents technical positioning rather than a fundamental shift in market dynamics.
The euro’s fragile recovery faces significant headwinds, with the ECB-Fed policy gap expected to widen further in coming months. While short-term factors like position squaring may provide temporary support, the currency’s broader trajectory remains downward unless U.S. economic data weakens sufficiently to alter the Fed’s policy path. Traders are now closely watching next week’s eurozone inflation data for clues on the ECB’s post-June policy direction.
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