The euro has been subject to moderate selling pressures, resulting in a downtrend during the session on Tuesday. As of today, the EUR/USD exchange rate is hovering around the 1.0750 mark. The current outlook suggests that the dollar's volatility may remain subdued through the end of this week, primarily due to a light economic calendar.
It’s only by next Wednesday that important U.S. CPI inflation data will be released, which could potentially have a more pronounced effect on the euro's performance relative to the dollar. This anticipatory atmosphere is keeping the market cautious and reactive to any minor economic indicators in the meantime.
Federal Reserve member Neel Kashkari has pointed out recently that fluctuations in inflation are prompting reconsiderations about the rigidity of monetary policy. He emphasized that it is most probable that interest rates will be kept steady for a longer duration, reflecting a strategy to ensure economic stability amidst unpredictable inflation trends. Such statements typically provide some insights into future monetary policy directions, which can influence currency strengths.
Although Kashkari suggested a steady approach, he also mentioned that adjustments in the form of rate hikes might be needed if inflation does not subside, indicating a delicate balance the Fed aims to maintain between fostering economic growth and controlling inflation.
Furthermore, Joachim Nagel, president of the Bundesbank and a member of the European Central Bank (ECB), has raised alarms about persistent inflationary challenges during one of his recent speeches. He highlighted several factors that contribute to inflation pressures, such as robustness in supply chains, potential shortages in the workforce due to demographic shifts, and the impacts of environmental transformations. These factors are pivotal as they could lead to sustained price increases.
Nagel’s remarks have served to mitigate the rate of the euro's fall by providing a counterbalance to the hawkish sentiments emanating from some Fed circles, thus stabilizing the euro somewhat against further declines.
According to the CME FedWatch tool, the market consensus now sees nearly a 35% chance that the Federal Reserve will keep interest rates unchanged in September. Concurrently, there is a strong expectation that the ECB will proceed with an interest rate cut in June. Given these projections, major and lasting gains in the EUR/USD pair appear unlikely in the near term.
The market's pricing of these probabilities reflects a cautious approach, weighing the potential for policy divergence between the U.S. and Europe which might influence currency valuations.
From a trading perspective, we are currently focusing on short positions given the euro's proximity to its year-long downward trend line. After a recent correction, a negative divergence is visible on the daily chart of the EUR/USD, suggesting a potential continuation of the downward trend.
Our analysis projects that this correctional phase may extend until next Wednesday, at which point we expect new U.S. inflation data for April. Should this data surprise on the upside, it might prompt an end to the current corrective phase in the EUR/USD market, possibly leading to new trading dynamics.
08.05.2024