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BUZZ-COMMENT-EUR/USD's lackluster gains on upbeat risk should concern longs

ReutersJan 17, 2025 3:51 PM

- EUR/USD rallied above the 5-day moving average and turned positive Friday on the back of risk-on trading, but the gains were limited, which could be an indication investors still expect the broader down trend to persist.

Risk assets rallied sharply on reports President-elect Donald Trump and China's President Xi held a phone call.

Trump said it was a good call for both the United States and China, with trade, TikTok and fentanyl discussed.

President Xi said he hoped for a positive start to China-U.S. relations.

China's yuan rallied sharply and gained against the dollar while other risk assets such as AUD/USD and equities ESv1 rose.

EUR/USD was left in the dust however and traded up only +0.04%, which may be a reflection of investor expectations that the Fed and ECB will diverge on policy.

The ECB is expected to remain on a cutting path while the Fed may pause its easing until later in 2025, which could leave the dollar's yield advantage over the euro intact.

German-U.S. spreads US2DE2=RR have tightened recently but the move stalled near -200bps, which is becoming an impediment for further tightening.

Fed SRAM26 and ECB FEIZ5 terminal rate spreads have also paused their tightening.

Unless signs emerge that Fed and ECB policy paths are converging, the downside risks for EUR/USD could remain in place.

For more click on FXBUZ

(Christopher Romano is a Reuters market analyst. The views expressed are his own)

((christopher.romano@thomsonreuters.com;))

Disclaimer: The information provided on this website is for educational and informational purposes only and should not be considered financial or investment advice.

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