- Throughout last week's trading, the EUR/USD attempted to rebound but its gains were limited and failed to surpass the 1.0700 level as selling pressure remains stronger and the US dollar has many factors of strength.
- Recently, It closed the week's trading stable around the 1.0655 level and in the same week the currency pair plummeted towards the 1.0601 support level, the lowest in five months.
Meanwhile, The EUR/USD rebound attempts came as fears of a possible escalation in tensions in the Middle East eased and investors compared the cautious stance of the European Central Bank (ECB) with the hawkish US Federal Reserve (Fed). Data from ECB policymakers had hinted at a readiness to start cutting borrowing costs as early as June, with several officials suggesting the possibility of three rate cuts by the end of 2024. However, market sentiment turned slightly bearish as expectations for rate cuts by both the ECB and the Fed were downgraded due to ongoing inflationary pressures and signs of economic resilience in the US.
Considering this discrepancy, the yield on German 10-year bonds crossed the 2.5% threshold, reaching its highest level since November 27, as concerns about a broader conflict in the Middle East diminished after Tehran clearly downplayed the Israeli attack on Iranian territory earlier in the day. Last Friday. In addition, investors lowered their expectations for interest rate cuts this year, supported by strong US economic data.
Revised expectations suggest that the ECB may only cut rates twice in total this year, implying a monetary easing of 70 basis points. Clearly, this change in expectations comes despite the bloc's central bank signaling its readiness to start cutting borrowing costs as early as June, with several officials hinting at three rate cuts this year. On the other hand, Fed officials are calling for a delay in rate cuts.
Overall, Federal Reserve officials are gearing up to provide further confirmation of the halt in inflation progress, supporting what appears to be a shift in tone to keep interest rates higher for longer than previously expected. Therefore, the preferred inflation gauge for policymakers—the Personal Consumption Expenditures (PCE) index—is likely to remain elevated in March, according to data scheduled for release this week.
According to the results of the economic calendar data, this index is expected to accelerate slightly to 2.6% on an annual basis as energy costs rise. The core gauge, which excludes food and energy, is expected to rise 0.3% from the previous month after similar gains in February. While PCE core data may not be as strong as the CPI (Consumer Price Index) - which beat estimates and rattled markets earlier this month - Fed Chairman Jerome Powell and other officials have indicated that it will take longer for them to gain the confidence needed to see inflation on a downward trajectory before cutting rates.
Policymakers are expected to monitor the traditional blackout period for speaking to the public during this week, ahead of their two-day meeting ending on May 1st. Consequently, next Friday's new inflation figures will be accompanied by personal spending and income figures for March. Against the backdrop of healthy job growth, economists anticipate further strong gains in household spending on goods and services. Additionally, income growth is also expected to accelerate.
EUR/USD Technical analysis and forecast:
According to the performance on the daily chart attached, the price of the euro against the US dollar “EUR/USD” is still bearish, although its recent losses moved all the technical indicators towards strong saturation levels for selling. However, the factors behind the US dollar’s gains are strong and continuous, and are represented by the clear discrepancy between the European Central Bank’s policy that is closer to reducing interest rates. Recently, the US Federal Reserve was ruled out from taking that step soon, in addition to the economic performance and the increasing demand to buy the US dollar as a safe haven.
Accordingly, the downward trend in the price of the euro against the US dollar may continue if these factors remain in place, at least until the US Central Bank’s preferred US inflation reading is announced this week. Currently, the closest support levels for the EUR/USD are 1.0600, 1.0545, and 1.0480, respectively.
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