The EUR/USD pair fell on Friday to 1.0835 during the European session as market sentiment on upcoming interest rate cuts turned cautious. The shift came on the heels of statements from Federal Reserve policymakers calling for a restrictive monetary policy stance for an extended period. These comments helped the US dollar recover from its sharp decline earlier in the week, which was caused by lower-than-expected inflation in the US, as revealed by the Consumer Price Index (CPI) report on Wednesday.
The corrective movement in the EUR/USD pair appears to be mainly driven by the recovery of the US dollar. However, the euro maintains its appeal, supported by ECB policymakers expressing uncertainty about the necessity of extending the interest rate cutting cycle immediately after the expected interest rate cut in June.
During the early London session, ECB Governing Council member Isabel Schnabel highlighted the uncertainty following June’s interest rate cut, noting that recent inflation data suggest that the final phase of disinflation represents a particular challenge. Schnabel stressed caution regarding potential upside risks to inflation from early interest rate cuts.
The April inflation report noted that headline inflation remained steady at 2.4% year-on-year, the lowest level in nearly three years. While inflation in services and energy prices fell, prices of food, alcohol and tobacco rose slightly. On a monthly basis, the headline CPI fell to 0.6% from 0.8% in March, in line with market expectations.
Significantly, the core CPI – which excludes energy, food, alcohol and tobacco – fell to 2.7% year-on-year, down from 2.9% in March, hitting its lowest level since February 2022. This core rate has now slowed for nine years. Consecutive months. Earlier in the week, the European Commission expected euro zone inflation to fall to 2.5% in 2024 and reach the 2% target by the second half of 2025.
Bond yields fall amid slowing US inflation
Yields are poised for a weekly decline as recent US data points to a slowdown in inflation and economic growth in April, boosting expectations for a rate cut from the Federal Reserve. German 10-year bond yields, the euro zone’s benchmark, rose 3 basis points to 2.47% but were on track to end the week down 5 basis points. Markets are now pricing in a 68 basis point cut in ECB interest rates for 2024, down from 72 basis points yesterday, and a 46 basis point cut by the Fed, down from 50 basis points. The spread between US 10-year Treasuries and German bunds, which reflects the expected policy divergence between the European Central Bank and the Federal Reserve, narrowed by 2 basis points to 190 basis points.
Monetary policy is appropriately restrained and does not currently need adjustment, New York Fed President John Williams said Thursday. Regarding inflation expectations, Williams said: “In the very near term, I do not expect to gain the greater confidence needed to see inflation progressing towards the 2% target.”
While markets remain skeptical about the US returning to the anti-inflation path, concerns are growing about labor market weakness, which could lead to the continued possibility of an interest rate cut at the September meeting. The rise in weekly initial jobless claims amplified uncertainty about the strength of the labor market. The U.S. Labor Department reported Thursday that initial jobless claims for the week ending May 10 rose to 222,000, beating the consensus of 220,000, though below the previous eight-month high of 232,000. Rising unemployment claims indicate declining job opportunities and potential layoffs. In addition, the April Non-Farm Payrolls (NFP) report showed a large deficit compared to estimates.
EUR/USD declines as US dollar rebounds amid Fed’s hawkish stance
The EUR/USD pair is retreating from its recent peak at 1.0894 as the US dollar regains strength after hitting a new monthly low. The US Dollar Index (DXY), which measures the dollar’s value against six major currencies, found support near 104.00 and rose to 104.60. This rebound in the US Dollar Index comes after statements by several Federal Reserve policymakers who emphasized the need to maintain current interest rate levels for an extended period. Federal Reserve officials maintain broadly hawkish interest rate expectations, suggesting that positive US inflation data, after a series of disappointing numbers, is unlikely to trigger a shift towards lower interest rates.
Also after John Williams, President of the Federal Reserve Bank of New York, stated on Thursday that monetary policy is appropriately restrained and does not currently need adjustment. “In the very near term, I do not expect to gain the greater confidence needed to see inflation progressing towards the 2% target,” Williams said, forecasting inflation.
EUR/USD: Bullish momentum in the middle of a symmetrical triangle
The EUR/USD pair is steadily falling towards the breakout zone to form a symmetrical triangle, centered around 1.0835. Despite this decline, the short-term outlook for the pair remains bullish. A breakout from this triangle formation usually results in heavy buying volume and broader market movements. Currently, the EUR/USD pair has good support above the 50-day and 200-day EMAs, trading near 1.0780 and 1.0788, respectively.
The 14-period RSI has entered the bullish range of 60.00-80.00, indicating strong upward momentum. Looking ahead, the EUR/USD pair is expected to continue its upward trajectory, potentially reaching the psychological resistance level at 1.1000.
