- EUR/USD alternated gains with losses around 1.0850.
- Germany’s Consumer Confidence matched consensus in March.
- Fed speakers continued to favour a rate cut later rather than sooner.
After experiencing an auspicious start to the week, EUR/USD remained within its recent range around the 1.0850 zone after once again faltering past 1.0860 earlier in the session.
Further weakness in the US dollar (USD) led the USD Index (DXY) to continue its two-week downtrend, nearing the critical 200-day SMA once more. A convincing breach of this level holds the potential to trigger a deeper short-term pullback to, initially, the interim 55-day SMA around 103.15.
The vacillating price action in spot rates also coincided with the continuation of the upward trend in German yields vs. mixed developments in the US yield curve, all amidst ongoing speculation about a potential interest rate cut by the Federal Reserve (Fed), possibly in June (or later).
In the meantime, expectations for a rate cut in June remained steady. According to CME Group’s FedWatch Tool, there is a nearly 53% likelihood of such action at the June 12 gathering, up from around 13% a month ago.
The possibility of the Fed implementing monetary easing gained momentum following stronger-than-expected US inflation data in January, supported by robust economic fundamentals and a tight labour market. On this front, the release of US inflation figures tracked by the PCE later in the week will be at the centre of the debate.
Around the Fed, Kansas City Fed President Schmid said the current state of the economy suggests that there is no immediate need to adjust the stance of policy in response to inflation, labour markets, and demand. Despite inflation running above the target and tight labour markets, Schmid believes that preemptively adjusting the policy stance is unnecessary. Instead, he emphasizes the importance of patience and closely monitoring how the economy responds to the policy tightening that has already taken place. In addition, Fed’s Bowman reiterated her commitment to exercising caution regarding monetary policy. She emphasized that if inflation consistently approaches the 2% target, it may become suitable to lower interest rates over time. However, she warns against prematurely reducing the policy rate, as this could necessitate future rate hikes. Bowman expressed readiness to raise the policy rate should there be any stagnation or reversal in inflation progress.
The view that the start of the easing cycle is later than investors anticipate is also shared by the ECB. On this, Board member Yannis Stournaras emphasized on Monday the importance of maintaining a cautious monetary policy, noting significant progress in inflation and suggesting a likely attainment of the 2% target by autumn. He recommended initiating the first rate cut in June with gradual adjustments of 25 bps each. Furthermore, President Christine Lagarde did not provide any news at her speech at the beginning of the week, highlighting the anticipation of persistent disinflationary trends and emphasizing the need for assurance that the Governing Council will guide inflation towards the 2% target sustainably.
EUR/USD daily chart
EUR/USD short-term technical outlook
The weekly high of 1.0888 (February 22) looks to be supported by the interim 55-day SMA (1.0885). The breakout of this zone may inspire EUR/USD to attain extra weekly tops at 1.0932 (January 24) and 1.0998 (January 11), bolstering the psychological barrier of 1.1000 and coming ahead of the December 2023 peak of 1.1139 (December 28).
On the downside, if the pair clears the lowest point of 2024 at 1.0694 (February 14), it may then chase the November 2023 bottom of 1.0516 (November 1). The loss of the latter might lead to a move to the weekly low of 1.0495 (October 13, 2023), which is below the 2023 low of 1.0448 (October 3) and the round level of 1.0400.
As long as the EUR/USD trades above the 200-day Simple Moving Average (SMA) of 1.0827, the pair’s outlook is expected to remain positive.
Looking at the 4-hour chart, the sluggish uptrend appears to be in place thus far. The next upward barrier is 1.0888, which occurs before 1.0897 and 1.0932. In contrast, the 55-SMA at 1.0800 provides preliminary support, with minor support levels at 1.0761, 10732, and 1.0694. The Moving Average Convergence Divergence (MACD) remained positive, while the Relative Strength Index (RSI) ticked higher past 62.
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