At the end of the week, the euro has overtaken the US dollar, with EUR/USD maintaining its momentum despite concerns that it could run out of steam after hitting the recent highs. However, the US currency is not planning to just throw in the towel.

On Thursday, March 30, the euro hit the highest level in 2 months against the US dollar amid rising risk appetite. The European currency was supported by hot inflation print from Germany, which made further interest rate increases in the EU more likely. According to preliminary estimates, consumer prices in Germany rose by 0.8% m/m and 7.4% y/y in March. This exceeded recent forecasts (0.7% m/m and 7.3% y/y respectively). In March 2022 the index moved by 2% at once, pushing down the annual inflation rate.

At present, inflation in Germany has decelerated thanks to falling natural gas prices, analysts say. However, it was still higher than forecasted by economists. Given this situation, the European regulator may need to tighten its monetary policy once again. The European Central Bank does not rule out such a possibility, but now the ECB has taken a wait-and-see approach.

According to experts, lower inflation in the eurozone does not mean soaring inflation rates has been defeated. After all, monthly inflation rates in Germany are still far from the 2% inflation target. However, the European regulator will need to tighten its monetary policy in order to stabilize the situation, as inflation in the euro area has accelerated over the past three months. In such a scenario, business activity in the region will slow down slightly and the euro will reinforce its position, experts added.

As a result, EUR rose by 0.8% to 1.0926. Last week, it briefly spiked above 1.0930, the highest level since early February, but retreated afterwards. Early on Friday, EUR/USD, increased by 3% and hit 1.0929. It is now fluctuating between 1.0901 and 1.0902 after bouncing off 1.9000 upwards.

Meanwhile, the US currency briefly weakened, as investors expected the global banking sector to stabilize. The US labor market data indicated that the unemployment rate would increase in the near future. In addition, market participants believe that the Fed's interest rate will peak soon and that there is no need for the regulator to tighten monetary policy as soon as possible.

The latest weekly US unemployment data put the number of jobless claims at 198,000, above both the consensus estimate of 195,000 and last week's record high of 191,000. It put the Fed's further interest rate hikes in doubt. While the number of weekly jobless claims in the US remains low, the total number of unemployment benefit recipients is still quite massive. Experts believe that significant changes are expected in the US labor market in the near future, which will push the Fed to slow down the rate hike cycle. This will leave the dollar without yield support, the experts conclude.

So far, the US currency has hit new lows after markets braced for the end of the Fed's rate hike cycle. But now the greenback has rallied and is now on its way to new highs. According to FX strategists, if the situation in the US labor market changes, investors will expect the regulator to cut interest rates. In this situation, the negative outlook for USD will become more likely.