The European Central Bank is moving closer to easing monetary policy and the first rate cut, which is practically a foregone conclusion as early as next month. The EURUSD pair is facing selling pressure, which pushed it twice in May, from the vicinity of 1.089 stopping the rally towards the psychological resistance, at the level of 1.10. At the same time, the macro data from the Eurozone, has been performing solidly recently, but investors are not reacting with euphoric purchases of the euro.
- This improvement is particularly evident in Germany, where we saw a stronger Ifo reading and higher PMIs, and today also a higher-than-forecast Gfk consumer sentiment reading, which indicated -20.9 versus -24.2 previously and -22.5 forecasts. However, Europe is not isolated in stronger-than-forecast readings, and the latest batch of publications - sentiment or PMI indexes from the US - shows that the world's largest economy is also still doing well. European bond yields may soon face a cascading decline, at a time when yields on 10-year US Treasury bonds rose above 4.5% yesterday.
- The market will soon experience a situation in which the gap between European and U.S. interest rates widens, through a change in policy at the ECB. At the same time, the Fed's Kashkari signalled yesterday that the Fed cannot rule out even a rate hike, and there should be no talk of easing until inflation data performs really encouragingly. As a result, improving macro data from the Old Continent does not significantly strengthen the euro and does not necessarily drive the pair above 1.10, as long as US data also remains solid, and the attitude at the Fed is clearly more hawkish than at the ECB.
- Moreover, policy easing at the ECB, while it may increase the chances of a 'soft landing' in Europe, may impose some dovish pressure on the euro. Admittedly, ECB representatives suggest a maximum of 'only' two cuts, this year, but after the first 'cut' the market may launch 'pivot' bets against the EUR. Today, EURUSD may react volatilely around 12:00 AM GMT, when we will know the preliminary CPI inflation from Germany for May. Also around 6 PM GMT, the world's main currency pair may see a spike in volatility, in view of the publication of the Fed's Beige Book.
EURUSD chart (M30 interval)
The area around 1.09 has twice triggered strong, supply-side pressure on EURUSD, and a drop below 1.08, where we see the 38.2 Fibonacci retracement of the upward wave from early May, could make a significant reversal of the upward momentum likely. On the other hand, a rise above 1.09 could embolden the bulls to attack the vicinity of 1.10, which could be helped by improved sentiment on the stock markets and a general increase in risk appetite.
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