Despite the European Central Bank keeping lower interest rates compared to the US, the euro has been strengthening since its April lows, supported by more robust business activity and positive economic indicators in Europe.
It is anticipated that the ECB could cut rates more aggressively than the Federal Reserve, which could expand the rate gap and potentially bring the euro closer to parity if market expectations shift.
The euro could appreciate further if economic sentiment in Europe improves above market expectations. On Wednesday, volatility could increase in the euro-dollar pair as all eyes will be on US inflation data.
A weaker-than-expected inflation reading could drive the dollar lower and support the euro. US Treasury yields could also react to the release of inflation data and could come under pressure if inflation declines further.
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