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EUR/USD dynamics amid US economic data and ECB policy shifts

eurusd analysis, forex trading

At the beginning of this week, the euro's value continues to exhibit minimal volatility, though it has recently approached a rate of 1.08 against the US dollar. Despite the stability, the focus on the EUR/USD exchange rate this week will be largely influenced by upcoming economic data from the United States, which has the potential to cause significant fluctuations. If the data reveals stronger-than-expected economic performance, it could disrupt the euro’s steady gain over the past three weeks. Particularly, the consumer inflation figures that are scheduled to be released on Tuesday and more crucially on Wednesday could play a pivotal role in either continuing or curtailing the recent upward trend of the euro against the dollar.

In the recent summary of its April monetary policy meeting, the European Central Bank highlighted that there is a "likelihood" that interest rate decreases could commence as soon as June, assuming the incoming economic data supports the inflation forecasts established in March. This statement by the ECB underscores a conditional approach to monetary policy, where decisions hinge on ongoing economic assessments rather than predetermined paths. The ECB members have collectively acknowledged that the data received so far align well with their initial projections made in March, which bolsters their confidence in a sustained disinflation trend across the eurozone, suggesting a controlled and gradual reduction of inflation rates.

Last week ended with several hawkish remarks from Federal Reserve officials that could impact market expectations regarding US monetary policy. Specifically, Michelle W. Bowman from the Fed's Board of Governors voiced on Friday her view against rate cuts this year, citing a need to observe improved inflation data for a few more months before considering such a move. This perspective reflects a cautious stance towards rapid policy shifts, emphasizing a data-driven approach. Simultaneously, Neel Kashkari, the president of the Minneapolis Fed, expressed concerns about the current policy possibly not being tight enough, hinting at the potential necessity for a further rate hike within the year. This could indicate that despite market sentiments leaning towards a potential rate cut by September, actual Fed policy may remain stringent if inflation remains uncontrolled.

Today, the euro's rate against the dollar edged closer to the 1.08 mark. However, the upward movement that has been observed over the past few weeks does not show significant momentum, suggesting a fragile recovery. We maintain that there is a possibility for this corrective rally to conclude near the trend line established earlier this year. The overall market trajectory will heavily depend on the forthcoming inflation data from the United States. A continued rise or stabilization in inflation could dampen hopes for an easing of monetary policy by the ECB and might strengthen the dollar, impacting the EUR/USD pair adversely.

Ultimately, the direction of the EUR/USD exchange rate in the near term will hinge on the inflation data to be released this Wednesday in the US. Our analysis suggests that inflation is likely to remain persistent in the upcoming months, which, if corroborated by Wednesday's data, could solidify the dollar's strength against the euro. If the inflation figures meet or exceed the market expectations, it could lead to a robust strengthening of the dollar, thereby exerting downward pressure on the EUR/USD rate, potentially leading to significant declines.

eurusd analysis, forex trading
EUR/USD daily chart, MetaTrader, 13.05.2024



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