- Ahead of the release of inflation figures for the eurozone, expectations have increased about the proximity of the date of cutting interest rates with the exclusion of the US Federal Reserve.
- This has brought strong selling operations to the EUR/USD price, causing losses that extended towards the 1.0602 support level, the lowest in five months.
After these losses, expectations continued regarding the future of the euro price against the US dollar EUR/USD in the coming days: such as Société Générale. Thus, a move below the 1.05 support is inevitable.
According to a new analysis from Société Générale, The EUR/USD exchange rate is on its way to fall below the psychological support of 1.05. In this regard, Kit Jox, senior forex analyst at Soc Gen Bank, says that further declines in the EUR/USD price can be expected due to the continued strength of the US dollar, which is linked to the country's superior economy. It eliminates the possibility of a mid-year rate cut by the US Federal Reserve. The analyst adds, "Stronger-than-expected US economic data over two weeks and higher-than-expected inflation figures have pushed back market expectations for near-term Fed easing and we have adjusted our expectations to look for an easing cycle that will begin in 2025."
Meanwhile, the chart attached shows Soc Gen's expected interest rate path for EUR/USD and indicates that while the market has begun a later start to raise the Fed compared to the ECB, there is more to be cut. He added: "A break below 1.05 EUR/USD is likely."
In general, Soc Gen economists have revised their expectations for US interest rate settings following the release of inflation data last week, saying that the economy is too strong to expect a cut in 2024. The market is about to agree, with only one fully priced this year, compared to over 150 basis points of easing that was expected at the dawn of 2024. This repricing of interest rate expectations is boosting US bond yields and supporting the dollar. According to Soc Gen, everything will depend on how CPI data evolves and how resilient the economy is, but the data needs to change significantly to reopen the door to rate cuts.
Among other expectations for the future of the euro/dollar price in the coming months:
After recent developments, US dollar speculators were forced to go into hibernation. ING Bank had lowered its expectations that the EUR/USD exchange rate would trade above 1.10 resistance this year. At the same time, MUFG added; "We see more declines ahead."
According to currency trading platforms, the EUR/USD pair recorded sharp losses as markets reassessed US interest rate expectations while the ECB's actions met cautious expectations.
The main event to push the price of the US dollar strongly against everyone was the recent inflation data in the United States. According to the results of the economic calendar data, core consumer prices rose by 0.4% monthly, with the inflation rate rising on an annual basis to 3.5% from 3.2%, compared to the agreed upon expectations of 3.4%. Core prices also rose by 0.4% during the month compared to expectations of 0.3%, with the annual rate stable at 3.8% and higher than expectations of 3.7%.
The economic data sparked a sharp shift in expectations surrounding Fed interest rates, with a June cut now considered unlikely, while banks have also reduced the number of expected cuts. For its part, Goldman Sachs commented, saying: “We believe that the US Federal Reserve will remain suspended at the current federal funds rate range, which ranges between 5.25 and 5.5% until the first reduction of 25 basis points in July, after which we expect rate cuts to continue.” Interest rates are at a quarterly pace with the next cut of 25 basis points in November.
Deutsche Bank added, "It is clear that recent developments - namely, upward inflation rates, strong Labor market data, and easing financial conditions - have reduced the justification for starting to cut interest rates." Accordingly, Deutsche now expects the first rate cut to be in December.
On the other hand, ING Bank pointed to the global context, stating, "The hot US consumer price index has been the driving force behind a significant rise in the dollar, but the cautious shift (even if moderate) in the messages from the European Central Bank and the Bank of Canada has made this rise now more sustainable. Both banks have signalled market bets on interest rate cuts in June, and this is true in light of much more encouraging local inflation expectations than those in the United States." They added, "In the current situation, it seems unlikely that the Federal Reserve will match this cautious approach, and the increasing divergence between the non-moving Federal Open Market Committee (FOMC) and a group of cautious central banks is gaining strength. Thus, this means a stronger dollar."
The European Central Bank kept interest rates at 4.5% while markets prepared for near-term interest rate cuts with tense hints about action in June. According to MUFG Bank, "The degree to which the European Central Bank was prepared to signal a possible cut in June was certainly as clear as possible with the statement subject to significant changes that put at its core the conditions that must remain as they are." They added, "Lagarde reiterated that the European Central Bank does not target foreign exchange levels - and we see increasing room for further declines in the EUR/USD pair."
At the same time, Danske Bank expects outperformance in the United States, stating, "We believe the US economy is fundamentally stronger compared to the Eurozone, based on factors such as relative trade exchange rates, real prices, and relative unit Labor costs. In addition, there are clear indications that core inflation appears more stable in the United States compared to the Eurozone." Danske added in this context, "The strength of the US dollar, along with stricter financial conditions, is necessary for the Federal Reserve to achieve sustainable inflation at 2%. Our expectations for the EUR/USD pair over the next 12 months are 1.05."
Meanwhile, Crédit Agricole adopts a similar viewpoint. They stated, "We expect the European Central Bank to start cutting interest rates early and more aggressively than the Federal Reserve, thus heading into uncharted territory for the EUR/USD pair this year." They added, "The downside risks for the EUR/USD pair could also grow if comparisons between the current situation and the US non-cut scenario in 1995 (when the Federal Reserve only cut three times) persist, encouraging investors to reduce expectations of larger interest rate cuts."
EUR/USD Technical Analysis and forecast:
The general trend of the EUR/USD price is still bearish and may remain so if the factors for the strength of the US dollar remain in place. The factors cause the strength of the US economic performance and the weak expectations of the imminent date of reducing US interest rates. On the other hand, the outlook remains pessimistic towards the policy of the European Central Bank, which will be the first to the pace of interest rate cuts. Ultimately, the psychological support of 1.0500 will be a legitimate target for bears considering the continuation of these factors and reasons.
Ready to trade our daily Forex forecast? Here’s a list of some of the best regulated forex brokers to check out.