EUR/USD Upbeat Ahead of EZ & US Inflation Updates

  • EURUSD
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EUR/USD Analysis

The European Central Bank is poised to become the first major institution to pivot and cut rates in its upcoming meeting next week, given substantial progress on inflation, which stood at 2.4% y/y in April. Latest commentary on Monday pointed to such action, as Mr Lane on FT said "there is enough in what we see to remove the top level of restriction" [1] and Mr Rehn noted it's "ripe in June to ease the monetary policy stance and start cutting rates" [2]. However, recent CPI and wage date have showed some persistence, while policymakers have generally warned against back-to-back cuts, making the ECB's rate path far from certain.

On the other side of the Atlantic, the Fed has shifted to a cautious stance around removing restraint, as the disinflation process has lost momentum this year, while the labor market is robust and the economy strong. There is some back and forth in market expectations, but last week's FOMC minutes led to hawkish repricing. CME's FedWatch Tool now assigns the highest probability to just one cut this year (from two previously) and has pushed back the timing to November (from October) [3]. However, the most recent CPI report showed moderation, offering signs the price pressure could continue to ease.

EUR/USD made a strong start to the week and heads towards its first profitable month of the year, having the opportunity to challenge 1.0981, but we are cautious around its ascending prospects. The monetary policy differential is unfavorable, so the path of least resistance is down. As such, we can see renewed pressure to the EMA200 (at around 1.0800). Daily closes below it would shift bias to the downside again, but there are multiple roadblocks past that level. Markets now brace for Friday's US PCE and preliminary Eurozone CPI inflation updates that can shape rate expectations and determine the pair's next move.

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Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 27 May 2024 https://www.ecb.europa.eu/press/inter/date/2024/html/ecb.in240527~ffaddc865d.en.html

2

Retrieved 27 May 2024 https://www.suomenpankki.fi/en/media-and-publications/speeches-and-interviews/2024/governor-olli-rehn-price-dynamics/

3

Retrieved 25 Jun 2024 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

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