EUR/USD dips below 1.0800 as Fed rate-cut prospects for September wane
- EUR/USD falls below 1.0800 amid dismal market mood.
- The ECB is widely anticipated to deliver a rate-cut move in June’s policy meeting.
- The US core PCE price index is estimated to have grown steadily in April.
EUR/USD extends its downside below the crucial support of 1.0800 in Thursday’s European session. The major currency pair faces severe pressure as the US Dollar (USD) strengthens amid cautious market sentiment. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps to a two-week high slightly above 105.00.
Investors rush to the US Dollar as they expect that the Federal Reserve (Fed) will not be leaning towards interest rate cuts anytime soon. Fed policymakers have made it clear that they want to see inflation slow for months to gain confidence that price pressures will sustainably return to the desired rate of 2%.
Fed officials see more rate hikes as less likely but have kept the possibility on the table if progress in the disinflation process stalls. For fresh cues on the interest rate outlook, investors shift focus to the United States core Personal Consumption Expenditure Price Index (PCE) data for April, which will published on Friday and significantly influence speculation for Fed rate cuts in September. Annual and monthly core PCE inflation readings are estimated to have grown steadily by 2.8% and 0.3%, respectively.
Daily digest market movers: EUR/USD exhibits weakness with eyes on Eurozone/US inflation data
- EUR/USD falls sharply below the round-level support of 1.0800. The shared currency pair comes under pressure as investors expect that the appeal of the Euro would weaken against the US Dollar. The speculation is based on the fact that the European Central Bank (ECB) looks set to start reducing interest rates from the June meeting, while the Fed has not committed timing of rate cuts.
- Noting that the Eurozone’s core inflation has already declined to 2.7% and the progress in the service disinflation process has resumed after stalling in the November-March period, ECB policymakers are comfortable with expectations of the central bank pivoting to policy normalization from June.
- As the June rate cut appears to be a done deal, speculation about the ECB’s rate-cut path beyond June will project the next move in the Euro. Currently, financial markets expect that the ECB will cut one more time this year. However, a Reuters poll of 82 economists from May 21 to 28 has suggested that the ECB will make two more rate cuts this year.
- At the start of the year, investors forecasted that the ECB would cut interest rates six times this year. However, the expectations for the number of rate cuts reduced as ECB policymakers warned that an aggressive policy easing approach could revamp price pressures again. Also, the uncertainty over wage growth momentum has prompted the odds of following a gradual rate-cut approach.
- On the economic front, investors will focus on the preliminary Eurozone inflation data for May, which will be published on Friday. The inflation data will provide cues about how far and fast the ECB will lower key borrowing rates. Economists expect that the annual Harmonized Index of Consumer Prices (HICP) rose at a stronger pace of 2.5% from the prior reading of 2.4%. The annual core HICP is estimated to have accelerated to 2.8% from 2.7% in April.
Technical Analysis: EUR/USD extends downside below 1.0800
EUR/USD sets a fresh swing low below the May 23 low around 1.0800, suggesting strong odds of a bearish reversal. The major currency pair fails to deliver a sharp upside move, generally observed after a Symmetrical Triangle chart pattern breakout. A downside move back into the triangle indicates that the breakout was fake, and the pair is set to return to the upward-sloping border of the above-mentioned chart pattern.
The shared currency pair has dropped below the 20-day and 50-day Exponential Moving Averages (EMAs), which trades around 1.0800, indicating that the near-term trend has turned bearish.
The 14-period Relative Strength Index (RSI) has slipped into the 40.00-60.00 range, suggesting that the momentum, which was leaned toward the upside, has faded for now.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.