- The EUR/USD slips under 1.0700 amid growing expectations of an ECB rate cut in June, contrasting with the Fed’s less aggressive stance.
- The ECB is poised to shift towards interest rate reductions next month, driven by Eurozone inflation tracking towards the 2% target.
- Meanwhile, Fed Chair Powell maintains optimism regarding potential rate cuts later in the year.
In the early American session on Thursday, the EUR/USD experienced a decline after breaking below the key support level of 1.0700. Despite efforts to rise, the currency pair struggled to surpass 1.0736 this week, largely due to expectations that the European Central Bank (ECB) will commence reducing its main borrowing rates starting from the June meeting. Although the Federal Reserve (Fed) has offered a slightly less hawkish outlook on interest rates, it hasn’t been sufficient to provide sustained support against the downward pressure.
Preliminary inflation data for April in the Eurozone revealed a steady growth in annual headline inflation, reaching 2.4%. However, the core Consumer Price Index (CPI), which excludes volatile food and energy prices, decelerated to 2.7% from March’s 2.9%. Despite investor expectations for a sharper decline to 2.6%, the data indicated a trajectory toward the desired 2% inflation rate. Consequently, ECB policymakers remain committed to initiating reductions in the Main Refinancing Operations Rate starting from June.
Meanwhile, there’s a division among ECB policymakers regarding the extension of the rate-cut cycle to policy meetings beyond June. Currently, financial markets speculate that the ECB will implement interest rate cuts three times throughout the year.
On the other side of the Atlantic, the US Dollar faces pressure as the Fed maintains optimism about potential quantitative easing later this year, despite acknowledging a stall in progress towards reducing inflation to 2%.
Daily digest market movers: EUR/USD falls sharply as US Dollar strives for firm footing
- The EUR/USD slips beneath the critical threshold of 1.0700 as the US Dollar aims to recoup losses stemming from the Federal Reserve’s less hawkish stance on interest rates than anticipated.
- The Fed’s decision to maintain interest rates within the range of 5.25%-5.50% for the sixth consecutive time didn’t surprise investors. However, the accompanying commentary signaled a desire to transition from a hawkish to a neutral stance. Fed Chair Jerome Powell, in the post-Federal Open Market Committee (FOMC) meeting press conference, reiterated the possibility of lower interest rates later this year, despite a slowdown in the disinflation process denting his confidence.
- A significant reduction in the scale of balance sheet tapering further indicated the central bank’s gradual shift towards quantitative easing. Starting June 1, the Fed plans to decrease the cap on Treasury securities allowed to mature without replacement to $25 billion, down from the current cap of up to $60 billion per month, according to Reuters.
- This announcement and its language exerted notable downward pressure on the US Dollar. Expectations for heightened volatility persist as investors await the release of key data, including the United States Nonfarm Payrolls (NFP) and ISM Services PMI for April,
- scheduled for Friday. Forecasts suggest the US NFP may have increased by 243K, a decrease from the 303K job additions recorded in March. The ISM Services PMI is expected to rise to 52.0 from 51.4 in March.
- Meanwhile, the US Dollar Index (DXY), which gauges the currency’s strength against six major counterparts, rebounds near 105.70 following the publication of steady weekly Initial Jobless Claims and weak Q1 United Labor Costs data. Initial jobless claims for the week ending April 26
Technical Analysis: EUR/USD struggles to sustain above 1.0700
EUR/USD is confined within Wednesday’s trading range, with resistance around 1.0735 due to expectations of the ECB initiating interest rate cuts sooner than the Fed. Uncertainty clouds the near-term outlook for the currency pair, with the 20-day Exponential Moving Average (EMA) at 1.0720 posing a significant obstacle for Euro bulls.
On the daily timeframe, EUR/USD displays sharp volatility contraction, forming a Symmetrical Triangle pattern. The upper border of the triangle pattern is traced from the October 3 low at 1.0448, while the lower border is set from the December 28 high around 1.1140.
The 14-period Relative Strength Index (RSI) oscillates within the 40.00 to 60.00 range, signaling a lack of conviction among market participants.
