EUR/USD Forecast: ECB Cuts, Focus Shifts to US NFP, CPI, and FOMC

We’ve now had a good few hours gone past the European Central Bank’s decision to cut interest rates and overall, the response in the EUR/USD has been quite muted. This suggests that the move was expected by the market, with investors already looking ahead to Friday’s US jobs report as well as CPI and FOMC rate decision in the week ahead. The EUR/USD forecast is modestly bullish in light of the overall weaker US data we have seen lately, although that could change should the US jobs report surprise sharply to the upside.

 

 

ECB’s Rate Cut: No Surprises for the Markets

 

The ECB was always going to cut interest rates today for the first time in nearly five years, even if recent Eurozone data had improved and wage pressures had suggested otherwise. In the end the, ECB chose to stick to its guns, and went ahead with the cut, outpacing its US and UK counterparts. The EUR/USD initially rose before easing back lower once Christina Lagarde spoke at the ECB press conference…before bouncing back again as investors reacted to a disappointing US initial jobless claims data.

 

The ECB lowered its benchmark deposit rate by a quarter percentage point to 3.75% but the statement was not dovish as it emphasised a data-dependent and meeting-by-meeting approach for future policy decisions.

 

The fact that it has avoided any commitment to a specific rate path, and acknowledging that domestic price pressures remain strong due to elevated wage growth, saw traders in swaps markets slightly reduce their bets on a second cut by September, from 70% to around 65%.

 

Eurozone inflation and wage growth

 

Inflation ticked up to 2.6% y/y in May, marking the first increase this year. The ECB noted elevated wage growth, and predicts inflation will stay above target well into next year. According to the ECB’s updated forecasts, CPI will average around 2.5% this year, falling to 2.2% in 2025, and 1.9% in 2026.

 

ECB President Christine Lagarde provided further insights during the ECB press conference.

 

Last month, Lagarde had expressed confidence that Eurozone inflation was getting under control. She didn’t deviate too much from that rhetoric, although acknowledged that wages are rising at an elevated pace. However she balanced that by adding that the risks to growth are tilted to the downside on the medium term horizon.

 

Global central banks move towards policy easing

 

Today’s rate cut by the ECB aligns with recent policy loosening by several other central banks. These include the Bank of Canada, which cut rates the day before, as well as central banks of Brazil, Mexico, Switzerland and Sweden. But the key focus and uncertainty remains on the world’s largest CB – the Federal Reserve…

 

EUR/USD forecast: Attention shifts to the Fed meeting and US data

 

In contrast to the above-mentioned central banks, the US Federal Reserve has consistently pushed back against early rates cuts. And next week, it is widely expected to maintain its rates at a 23-year high of 5.25 to 5.50%. This is due to persistent price pressures, which will be in focus again with the releases of average hourly earnings data on Friday and CPI on Wednesday- the same day as the FOMC meeting. Ahead of the these events, the latest jobs report is due for release on Friday.

 

US labour market and dollar outlook

 

We are starting to see signs of weakening US labour market. Today’s jobless claims data showed a rise of 229K vs. 220K expected and 221K last week. This comes on the back of a weaker ADP private sector payrolls report the day before and weaker JOLTS Jobs Openings on Tuesday. These pre-NFP leading indicators suggests the jobs data may disappoint expectations again, following last month’s 175K reading that was 60K-65K below forecasts. This time, the headline jobs growth is expected to be 185K with the unemployment rate seen steady at 3.9%. As mentioned, the average hourly earnings will be just as important. This is expected to rise by 0.3% month-over-month.

 

EUR/USD technical analysis

Source: TradingView.com

 

The EUR/USD pair has generated modest bullish momentum but remains within a consolidation range. It has not yet managed to break decisively above April's high of 1.0885. On the downside, support in the 1.0785 – 1.0800 range continues to hold, with additional interim support around the 1.0850/60 zone.

 

The overall trend appears modestly bullish after breaking the bearish trend line established since December. Bulls are likely to remain confident as long as the key support around the 1.0800 level is maintained.

 

In the short term, resistance is found at the 1.0885-95 range, which has held after being tested earlier this week. This area was also the peak in April and has posed resistance in recent weeks. A decisive breakout above this level could open the path for a potential rise toward the March high of 1.0981 and eventually the 1.10 level.

 

 

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Stay tuned for more in-depth analysis on the EUR/USD forecast. We'll continue to provide updates on market movements, key economic indicators, and technical insights to help you stay informed and make well-informed trading decisions.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R