Monday, July 22, 2024
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EUR/USD Forecast: Pressure to cut ECB rates looms

by xyonent
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  • Market participants are all but certain that the ECB will cut interest rates on Thursday.
  • The interest rate differential between the eurozone and the US will widen.
  • The U.S. core PCE price index rose 0.2% in April, slowing from a 0.3% increase in the previous month.

EUR/USD expectations are bearish as investors prepare for a European Central Bank interest rate cut this week, while the dollar steadied after inflation expectations fell short on Friday, raising expectations of a Fed rate cut in September.

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Market participants are all but certain that the ECB will cut interest rates on Thursday, which would likely widen the interest rate gap between the euro zone and the United States and send the euro weakening against the dollar.

But the path is more uncertain from Thursday onwards, especially following last week’s euro zone inflation report. Data on Friday showed inflation rose 2.6% in May, up from a 2.4% increase in the previous month. With inflation moving away from the central bank’s target, the ECB may pause policy after Thursday.

Meanwhile, the dollar fell for the first time this year in May as US inflation eased and expectations grew that the Fed would cut interest rates in September. The first indicator of easing inflation was the Consumer Price Index report. Recently, the core PCE price index rose 0.2% in April, slowing from a 0.3% increase the previous month. Economists had expected it to remain at 0.3%. As a result, following the report, the likelihood of the Fed cutting interest rates in September rose from 49% to 53%.

If inflation continues on this downward trend, the Fed will come under further pressure to cut rates in September, although this will be well after the ECB’s first rate cut.

Major Events for EUR/USD Today

  • US Finished Manufacturing PMI
  • US ISM Manufacturing PMI

EUR/USD Technical Forecast: Fluctuations between 1.0800 and 1.0880

EUR/USD 4-hour chart

On the technical front, the EUR/USD price is trading within a range with a support at 1.0800 and a resistance at 1.0880. This sideways move came after a bullish trend that failed to continue above the resistance at 1.0880. Therefore, this could be a corrective move leading to a continuation or reversal of the uptrend.

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The price has been falling in the range and after retesting the range resistance, it has broken out of the 30-day SMA. As a result, the bears have taken the lead. If the price closes below the SMA, it can fall to retest the range support.

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