Tough talk from the ECB may not help EUR/USD bulls
Oct 24 (Reuters) -EUR/USD traded higher Thursday with help from cautious ECB rhetoric on rate cuts, but gains are likely to be fleeting as interest rate differentials and diverging economic growth should keep downside risks elevated.
In a Bloomberg interview, ECB policymaker Joachim Nagel counseled against being "too hasty in cutting rates" and calling off the ECB's fight against inflation. Nagel made the comments despite inflation being near target.
Interest rates markets didn't bite on Nagel's comments especially since French, German and euro zone October PMIs indicated economic growth remains elusive.
German-U.S. spreads US2DE2=RR increased the dollar's yield advantage over the euro as they hit their widest since late April. Terminal rate spreads for the Fed SRAM26 and ECB FEIZ5 also widened to -161.5bps as investors still expect the ECB to cut more aggressively than the Fed.
U.S. PMI data and Fed rhetoric reinforced the diverging rate cut paths.
October S&P Global PMIs came in above estimates with the services component increasing to 55.3 from 55.2 in September and against estimates of 55.0.
Cleveland Fed President Beth Hammack said work to bring inflation to target is not complete, which suggests the Fed may cut only gradually.
EUR/USD may unwind short-term oversold conditions but as long as spreads favor the dollar and U.S. data outperforms euro zone data, the downside risks will remain.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)
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