- The EUR/USD currency pair continued its downward trend last week, with bears successfully pushing the pair towards the psychological support level of 1.0800 and closing trading around 1.0836.
According to Morgan Stanley, the euro is expected to decline against the US dollar as the European Central Bank embarks on a faster and deeper rate cut cycle to close the widening output gap in the euro zone. Morgan Stanley analysts say, "The euro has room for a downward correction in a faster and deeper cut cycle," in a view that contradicts the prevailing belief that the euro is expected to rise against the dollar in 2024 and 2025. Meanwhile, those forecasts come at a time of relative calm in the forex market, with the EUR/USD exchange rate trading in a relatively narrow range between 1.07-1.09 amid a decline in global currency market volatility.
Many analysts agree that this results from market expectations that major global central banks will cut interest rates at around the same time, starting in June This means that there is not much difference in short-term interest rate expectations to drive meaningful exchange rate trends. Obviously, this reminds us that interest rate expectations remain a key driver of the forex market, and the problem for those who want volatility is that global central bank interest rate expectations have simply followed the US Federal Reserve in 2024, leading to limited movements.
On the economic side, inflation remains high in the United States and the eurozone, which supports the assertions of central bank governors in the two regions that it is too early to start lowering interest rates. According to economic calendar results, the Federal Reserve's preferred measure of core inflation rose the most in a year in January, while price pressures in the euro zone fell less than expected in February.
The US Personal Consumption Expenditures Price Index, which excludes volatile food and energy components, rose 0.4% from December, the largest increase in a year. Also, inflation-adjusted consumer spending fell for the first time in five months after a strong holiday shopping season. Consumer sentiment faltered in late February as current and future views of the economy deteriorated, reversing an earlier rise in optimism. Historically, this decline was the largest since March 2020.
Euro zone inflation also fell below expectations in February, according to recent data, supporting European Central Bank officials who are reluctant to rush into cutting interest rates. While policymakers are optimistic that inflation is heading towards their 2% target, they remain concerned that rising wages and labor costs could keep price pressures high for longer.
Overall, Federal Reserve Chairman Jerome Powell is expected to reiterate his message that there is no rush to cut interest rates, especially after new inflation data showed price pressures are persisting. Powell heads to Capitol Hill, where he will testify on monetary policy before a House committee on Wednesday and a Senate committee on Thursday. Recently, the Fed chairman and nearly all of his colleagues have said in recent weeks that they can afford to be patient in deciding when to start cutting rates given the underlying strength of the US economy.
Powell added in an interview that "the danger of moving prematurely is that the job is not yet done completely, and the really good readings we've had over the past six months show in one way or another that they're not a true indicator of inflation direction." This cautious approach has been validated in recent weeks through data showing an increase in inflation last month. However, this is unlikely to satisfy Democrats, who are concerned about how the trajectory of interest rates will impact the November elections and voting races. Also, they are expected to pressure the Federal Reserve Chairman on why officials are keeping borrowing costs excessively high, risking damage to the economy, while they have made significant progress on inflation.
This week, the most prominent economic data will be the monthly US jobs report next Friday. Economists expect February payroll growth to decline to 200,000 after an increase of 353,000 in the previous month, which was the largest in a year. Also, the country's unemployment rate is expected to remain steady at 3.7%, while hourly earnings growth is likely to slow.
EUR/USD Technical analysis and forecast:
The EUR/USD currency pair is currently trading around the 200-day Simple Moving Average (SMA), and it's likely that key releases and events this week will help the currency pair make a more decisive move. Technically, the support levels for the EURUSD are found between the levels of 1.0787 to 1.0800 – the week's lows. Also, the 20-day Simple Moving Average (SMA), and an old swing high – and if this level is breached, the impact may initiate a retest of the multi-month low on February 14 at 1.0695. Moreover, a clear break above the 200-day SMA would refocus attention on a cluster of recent highs, the 50-day SMA, and the 23.6% Fibonacci retracement level around the 1.0850/60 area.
Based on the performance on the daily chart below, the psychological resistance at 1.1000 will remain crucial for significant directional changes towards an upward trend.
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