The dollar has already dropped during Asian trade and has scope to fall back further as its jump higher late on Tuesday was “quite surprising” and lacked a clear catalyst, ING said.
“The rise in U.S. rates did not look large enough to justify the rotation from European FX (EUR and GBP) back into the dollar,” it said.
“We…therefore see room for the dollar correction initiated overnight to extend today.”
J.P. Morgan said Wednesday’s flash estimate purchasing managers data are likely to be important for the euro ahead of the European Central Bank’s meeting on Thursday.
The ECB is expected to reiterate vigilance on inflation and push back against interest-rate cuts priced in by markets, but the stance will need to be backed up by solid data to lift the euro, JPM added.
“This is unlikely to move the needle on the outlook for the euro without an accompanying shift in the data corroborating the ECB stance.”
JPM said EUR/USD was undershooting fair-value of 1.10 based on elevated real-rate differentials, improving terms of trade and tighter peripheral spreads.
Sterling rose to its strongest against the euro since September 2023 after U.K. provisional purchasing managers’ surveys for January beat forecasts, diminishing prospects of early Bank of England interest-rate cuts.
The data will add to the BOE’s concerns about persistent inflation, Capital Economics said.