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Inflation and interest rate dynamics: Outlook for the EUR/USD

eurusd analysis, forex trading

Inflation is once again emerging as a concern in the United States, suggesting that the Federal Reserve (Fed) should be cautious about lowering interest rates too soon this year. The problem is that market expectations were heavily tilted towards a rate cut in June, but these expectations were quickly shifted to September instead.

According to financial analysts, the U.S. dollar remains undervalued, and they forecast that the EUR/USD exchange rate will drop to below 1.07 in the upcoming weeks, reach approximately 1.05 around the summer vacation period, and decrease further to 1.03 by the end of the year. This euro-dollar forecast is based on the latest market trends and economic indicators.

The past week has provided crucial information for the currency market, enabling analysts to gain a better understanding of what the future monetary policies of the world's leading central banks might look like. Insights from the U.S., combined with official remarks from representatives of the Federal Reserve, suggest that any potential reductions in interest rates are likely to be postponed until the autumn.

Meanwhile, in meeting, the European Central Bank (ECB) is possibility of its first rate cut in June, but ultimately decided to keep interest rates steady. This decision was interpreted by the market as an indication that a cut might occur in June, signaling a potential long-term directional change for the euro, and possibly leading to continued declines in the EUR/USD pair.

Recently, the EUR/USD exchange rate has shown a significant downward trend. This decline is anticipated to continue throughout the year due to expected divergences in the monetary policies of the ECB and the Fed. Analysts predict that the EUR/USD will continue to reach new lows below 1.07 in the next few weeks, dip to around 1.05 during the holiday season, and drop to 1.03 by year's end. These projections are based on current economic conditions and policy expectations, which suggest a stronger dollar against the euro.

At its most recent meeting, the ECB decided to maintain its interest rates at the current level of 4.5%. The central bank's forward guidance suggests that it has achieved its target interest rate level, with the main challenge now being the high rate of wage growth. This situation, coupled with weak credit activity, might encourage the ECB to start implementing rate cuts from mid-year onward. At the next meeting, rates are expected to remain at their current level. Over the next year, the market anticipates a total of 130 basis points in rate cuts.

These observations were made following the release of U.S. inflation data, which exceeded expectations and resulted in a significant strengthening of the dollar. Currently, the markets anticipate that the eurozone, where recent consumer price data has come in below estimates, will undergo three rate cuts in 2024, compared to less than two cuts expected from the Fed. This disparity in anticipated central bank actions suggests different economic trajectories for the eurozone and the United States.

Finally, the EUR/USD rate recently fell below the critical support level of 1.07. The medium-term technical analysis, represented by the weekly chart of EUR/USD, supports a short-term bearish outlook with a target around 1.05. This technical perspective is aligned with the broader economic and policy forecasts, which see the euro weakening further against the dollar. As the market awaits inflation data for April from the eurozone, the current trend remains bearish, though critical support around 1.0650 will be key in determining short-term movements in the exchange rate.

eurusd analysis, forex trading
EUR/USD daily chart, MetaTrader, 14.04.2024



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