The euro's appreciation is supported by economic fundamentals, and the adjustment of interest rate differentials has yet to reverse the situation.

Behind the recent upward trend of the euro against the US dollar, fundamental economic factors have played a key role. The foreign exchange strategy team at Société Générale recently published an analysis stating that the latest economic data from the US and the Eurozone generally favor the euro. Nevertheless, concerns over US policy uncertainty and changes in overseas investors’ holdings of US debt remain hot topics among investors.

Economic Fundamentals as the Main Support for the Exchange Rate

The euro’s recent performance has benefited from solid macroeconomic fundamentals. Relatively strong economic data from the US and Europe provide strong support for the euro. This appreciation driven by economic fundamentals is more sustainable and convincing than simply relying on interest rate differentials.

Limited Scope of Interest Rate Differential Adjustment, Difficult to Be Decisive

Although the interest rate differential between the two economies is gradually adjusting in favor of the euro, the magnitude remains moderate. Importantly, this adjustment level is still significantly below the interest rate environment during the period when the euro/USD exchange rate broke above 1.20 in 2020. This means that, based solely on interest rate differentials, the euro lacks sufficient momentum to push the exchange rate to a substantial breakthrough.

Market Focus: US Policy and Foreign Capital Flows

Currently, investors are most concerned about US policy directions and international capital attitudes toward US assets. Foreign investors’ willingness to allocate to US assets directly impacts dollar demand. These uncertainties are frequently discussed and evaluated in the market, acting as invisible factors influencing the euro-dollar exchange rate.

Overall, the recent upward movement of the euro is supported by solid economic fundamentals. While the interest rate differential adjustment is heading in the right direction, its strength is insufficient to drive a breakthrough in the exchange rate on its own.