- EUR/USD holds gains near 1.0780 as Fed rate-cut speculation keeps the US Dollar on edge.
- Easing US labor market conditions strengthens Fed rate-cut prospects.
- The ECB is projected to deliver three rate cuts this year due to easing Eurozone inflation.
EUR/USD is struck in a tight range slightly below the crucial resistance of 1.0800 in Friday’s European session after a sharp recovery from 1.0725. The major currency pair holds strength as investors have already discounted the fact that the European Central Bank (ECB) will start lowering its borrowing rates in June.
However, ECB policymakers are divided over extending the rate-cut cycle after the June meeting. A few policymakers believe that additional interest rate cuts from the July meeting could revamp price pressures.
ECB policymaker and Bank of Greece Governor Yannis Stournaras said in an interview with a Greek media outlet last week that he sees three rate cuts this year. He sees a rate cut in July as possible and added that an economic rebound in the first quarter made a three-cuts scenario more likely than four. The Eurozone economy expanded by 0.3% in the January-March period, beating expectations of a 0.1% growth.
On the contrary, ECB Governing Council member and Governor of Austria’s central bank, Robert Holzmann, said on Wednesday that he doesn’t see a reason to cut key interest rates “too quickly or too strongly,” Reuters reported.
This week, EUR/USD has been driven by market sentiment due to the absence of tier-1 Eurozone and United States economic data. However, next week, investors will focus on the US Consumer Price Index (CPI) data for April, which will be published on Wednesday.
Daily digest market movers: EUR/USD clings to gains amid cheerful market mood
- EUR/USD shows strength slightly below the round-level resistance of 1.0800 at 1.0780 due to improved market sentiment. The appeal for risk-perceived assets is strong amid firm speculation that the Federal Reserve (Fed) will start reducing interest rates in September. S&P 500 futures have posted significant gains in the European session, signalling investors’ higher risk appetite.
- Expectations for the Fed to begin lowering interest rates in September have strengthened as the US labor market showed further signs of cooling. On Thursday, the US Department of Labor reported that Initial Jobless Claims rose significantly to 231K (the highest level since November 10 week), exceeding the consensus of 210K and the prior reading of 209K.
- Apart from the higher-than-expected jobless claims, weak Nonfarm Payrolls (NFP) for April and slower job openings in March have dented investors’ confidence in the strength of the US labor market. Job growth was the lowest in six months and job postings were the lowest in three years.
- Cooling US labor market conditions indicate that the job market is struggling to bear the burden of the Fed’s restrictive monetary policy framework. The context has boosted Fed interest rate-cut prospects for September. The CME FedWatch tool shows that traders see a 71% chance that interest rates will decline from their current levels in September, which is higher than the odds of 66% recorded a month ago.
- This week, Minneapolis Fed Bank President Neel Kashkari said that weakness in the job market could justify a rate cut. However, he remained lean towards maintaining the current interest rate framework for the entire year. Kashkari signalled concerns over stalling progress in inflation declining to 2% amid a strong housing market.
Technical Analysis: EUR/USD aims to recapture 1.0800
EUR/USD is steadily approaching the downward-sloping border of a Symmetrical Triangle pattern formed on a daily time frame, which is plotted from December 28 high around 1.1140. The upward-sloping border of the triangle pattern is marked from the October 3 low at 1.0448. The Symmetrical Triangle formation exhibits a sharp volatility contraction.
The major currency pair has come closer to the 200-day Exponential Moving Average (EMA), which trades around 1.0780.
The 14-period Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among market participants.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
