EUR/USD: Four factors that could trigger a corrective decline

The EUR/USD has been hovering around 1.10 for nearly a month. In the current risk environment, economists at Societe Generale believe that investors should take note of a series of risks to our central scenario that could restore volatility and trigger a temporary rebound in the US dollar.

Seasonal Factors

Over the past 20 years, May has been the worst month for EUR/USD, with the euro declining in 63% of years. In the 12 bearish years, the average spot return has been -2.9%.

Hawkish Fed Repricing

The current stance of the Fed could be described as “hawkish pause,” with the market pricing in over 50 basis points of rate cuts this year. If the pace of U.S. CPI deceleration is not fast enough, the Fed may be forced to reconsider and potentially trigger a more difficult landing. A return to a hawkish path where the market no longer expects rate cuts would be painful and could boost the dollar.

The European Central Bank Tightens Its Stance

The latest bank lending survey shows a sharp contraction in credit, indicating that higher rates may have already hurt activity in the eurozone as core inflation risks rise. The eurozone manufacturing PMI is currently at its lowest level since June 2020.

The U.S. banking industry

Tightening credit conditions are putting pressure on regional banks in the United States, particularly those with higher concentration risk in commercial real estate (CRE). This risk is more likely to be reflected in foreign exchange volatility rather than the US dollar itself.