- EUR/USD will consolidate around 1.0770 after adjusting from 1.0800 as investors expect the ECB to cut interest rates from June.
- ECB Stournaras’ prediction of three interest rate cuts this year is in line with market expectations.
- Expectations have grown that the Federal Reserve will cut interest rates starting in September.
In European trading on Tuesday, EUR/USD was slightly lower at 1.0760, down 0.10%. A lack of high-level data from the US and euro area has created a mood of indecision among investors, with the common currency pair largely flat around 1.0770.
Investors have factored in weak April US non-farm payrolls (NFP) and ISM Services Purchasing Managers’ Index (PMI) data, increasing expectations for the US Federal Reserve (Fed). As a result, the US dollar (USD) strengthened, and the top of the major currency pairs stalled around 1.0800. (Fed) will lower interest rates from its September meeting. According to the CME FedWatch tool, traders see a 67% chance that September rates will be lower than current levels, up significantly from the 46% chance recorded a week ago.
Despite declining confidence in the U.S. economic outlook, Fed policymakers favor keeping interest rates subdued for an extended period of time, citing a stubborn outlook for inflation. Richmond Fed President Thomas Barkin said Monday that inflation risks remain on the upside and demand needs to be hit to end the fight against inflation.
Recently, the Institute for Supply Management (ISM) reported significantly higher price paid indexes for both manufacturing and services PMIs. This suggests that prices paid by businesses for inputs have increased significantly, indicating a robust outlook for price pressures.
Daily Digest Market Fluctuation Factors: EUR/USD juggling after correction from 1.0800
- EUR/USD has been moving in a narrow range around 1.0770 as major economic indicators for the euro area have not been released this week. Investors are expected to predict the euro’s next move based on speculation about the European Central Bank’s (ECB) interest rate outlook.
- Financial markets expect the ECB to extend its rate-cutting campaign, scheduled to begin at its June meeting. ECB policymakers expect three rate cuts this year, which is in line with market expectations.
- ECB policymaker and Bank of Greece Governor Giannis Stournaras said in an interview with Greek media that he expected three interest rate cuts this year. He said he thought a rate cut in July was possible, adding that the recovery in the euro zone economy in the first quarter of this year made three rate cuts more likely than four.
- The consistent easing of price pressures has given the ECB increased confidence that it will start cutting interest rates in June. The euro area’s core consumer price index (CPI), the ECB’s preferred inflation measure, has been consistently declining since July 2023. The annual core CPI fell to 2.7% in April, suggesting that inflation is trending back to desired levels. 2%.
- In addition, the rapid decline in services inflation in the euro area has also strengthened the ECB’s confidence in lowering interest rates at its June meeting. The euro zone’s annual services inflation slowed to 3.7% in April after holding steady at 4% for five months. ECB policy member Philip Lane said April’s inflation data finally showed progress in service prices. However, he warned that the ECB would continue to focus on services so as not to undermine inflation control.
- Meanwhile, Eurostat reported strong retail sales data for March. Monthly retail sales increased significantly from 0.6% to 0.8% in the forecast, after he decreased by 0.3% in February. For the year, retail sales increased by 0.7% (revised from -0.7%), after he decreased by 0.5% in February.
Technical analysis: EUR/USD stabilizes around 1.0770
EUR/USD is trading in a narrow range around 1.0770. Major currency pairs are struggling to find direction in the absence of top-notch economic events. The overall trend of the major is also sideways due to the formation of a symmetrical triangle on the daily time frame.
EUR/USD shows sharp volatility reduction due to symmetrical triangle formation on daily timeframe. The upward boundary of the triangle pattern is plotted from the October 3rd low of 1.0448, and the downward boundary is placed near the December 28th high of 1.1140.
The 14-period Relative Strength Index (RSI) has moved into the 40.00-60.00 range, suggesting indecision among market participants.
The asset is trading above its 20-day exponential moving average (EMA) near 1.0723, suggesting a bullish near-term outlook.
ECB FAQ
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank of the euro area. The ECB sets regional interest rates and controls monetary policy. The ECB’s main mission is to maintain price stability, which means keeping inflation at around 2%. The main means of achieving this is by raising or lowering interest rates. Relatively high interest rates usually result in a strong euro and vice versa. The ECB Governing Council decides monetary policy at its eight annual meetings. Decisions will be made by the heads of the euro zone national banks and the six permanent members of the ECB, including ECB President Christine Lagarde.
In extreme circumstances, the European Central Bank can enact a policy measure called quantitative easing. QE is a process in which the ECB prints euros and uses them to buy assets (usually government and corporate bonds) from banks and other financial institutions. QE usually leads to a weaker euro. Quantitative easing is a last resort when the objective of price stability cannot be achieved by simply lowering interest rates. The ECB used this system during the great financial crisis of 2009-2011, in 2015 when inflation remained stubbornly low, and during the coronavirus pandemic.
Quantitative tightening (QT) is the opposite of QE. This is done after quantitative easing, when economic recovery is underway and inflation begins to rise. In QE, the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide liquidity, but in QT, the ECB suspends additional bond purchases and waits until the maturity of bonds it already owns. Stop reinvesting principal. Usually positive (or bullish) for the euro.
