- Since the start of trading this week, the EUR/USD currency pair has been attempting to rebound upwards.
- These rebound gains have not exceeded the 1.0858 resistance level.
- It is stabilizing around 1.0850 at the time of writing the analysis and before the announcement of the US inflation figures and the content of the minutes of the last meeting of the US Federal Reserve.
The reaction will be strong on the performance of the EUR/USD so caution is required. After these important events, the euro price will await the decisions of the European Central Bank tomorrow, Thursday. The European Central Bank is not likely to keep interest rates at their current restrictive levels, according to economists at two European investment banks, one of whom said that we could be surprised by a rate cut on Thursday.
In this regard, Nick Konis, an economist at ABN AMRO, says: "We see that interest rates are currently in a very restrictive area." Added, "The eurozone economy has been in recession for more than a year."
These expectations come ahead of the ECB's April monetary policy decision, due to be announced tomorrow, Thursday, when interest rates are expected to be kept unchanged. Overall, the ECB is expected to provide guidance that it will cut interest rates for the first time in June and say that any further rate cuts will depend on incoming economic data, a message that is likely to prevent the market from raising bets strongly on further rate cuts.
In general, the low volatility environment affecting global forex exchange markets reflects the doubt that the ECB and other global central banks in developed markets intend to emulate the US Federal Reserve when it comes to cutting interest rates, in the hope of avoiding any potential negative currency effects that early movers may be inclined to.
Meanwhile, one need only look at the sharp sell-off in the Swiss franc following the Swiss National Bank's surprise decision to cut interest rates in March to show the extent of the difference in risk policy. But the analyst says the ECB's cautious stance is unwarranted because the US economy has proven to be much stronger than the eurozone economy. He explains: "The US Federal Reserve does not have a great urgency to cut interest rates given the strong growth backdrop, making a monetary policy link between the two central banks unlikely."
ABN AMRO Bank augmented that the only justification for restrictive monetary policy is inflation that exceeds the target. Added, “However, the inflation picture is changing rapidly. Even assuming an interest rate cut of 125 basis points in the second half of this year, monetary policy will remain constrained at the end of 2024.” The analyst included that there are “very few compelling reasons” why the ECB cannot cut interest rates as early as this week’s ECB meeting, and that any delay until June is confirmation that the central bank is pursuing a monetary strategy that “relies on... The US Federal Reserve Bank” which comes at the expense of a “data-driven” policy.
Julius Baer adds that low inflation and stable central bank interest rates mean that real interest rates in the euro area rose from 0% in September 2023 (when interest rates were last raised) to 1.6% in March. Also, the economists at ABN AMRO say the ECB will cut interest rates in June, and the real question for markets is what happens next.
EUR/USD Technical Analysis and forecast:
As mentioned before, the stability of the EUR/USD exchange rate near the psychological support level of 1.0800 will continue, supporting further bearish dominance in the trend. If the US dollar gains positive momentum from today's data, bears may push the currency pair towards stronger support levels, with the next targets being 1.0745, 1.0660, and 1.0580, respectively. Moreover, from the second and final level, technical indicators will move towards oversold levels.
On the other hand, if US inflation figures come in lower than expected, bulls may have an opportunity to exploit the recent upward rebound. As mentioned before, the psychological resistance at 1.1000 remains crucial for a bullish trend reversal. So far, any gains for the EUR/USD will remain temporary and not sustainable, given the euro's loss of investor confidence in the future of the European Central Bank's policy.
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