Euro Forecast: Bearish
- ECB’s Schnabel cautions against rate cut speculation beyond June
- EUR/USD (bearish): USD likely to regain favour with superior rate differential
- EUR/GBP (neutral): Crucial UK CPI Identified for its Potential to Surprise
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The ECB’s Schnabel Cautions Against Rate Cut Speculation Beyond June
The ECB’s Isabel Schnabel highlighted the June meeting as a possible opportunity for the central bank’s first rate cut since the hiking cycle. June has been mentioned many times by many ECB officials as an appropriate date to cut interest rates that it is all but guaranteed now. The slightly hawkish official did however caution against rate cut expectations after June and revealed a preference for a gradual process to avoid loosening financial conditions at a time when the path of inflation is still uncertain.
Markets price in two 25 basis point rate cuts with a decent possibility of a third before year end, 66 basis points worth of cuts in total. The ECB prefers to follow Fed policy but contrasting economic conditions and inflation profiles mean the ECB is likely to have to go at it alone this time.
Market implied cuts (in basis points) for 2024
Source: Refinitiv, prepared by Richard Snow
EUR/USD (Bearish): USD Likely to Regain Favour with Superior Rate Differential
EUR/USD rose notably after US CPI headed back down once more. A spate of hotter-than-anticipated monthly price rises has markets concerned that the ‘last mile’ of the disinflationary process could extend into persistently hotter inflation.
Softer US labour data has also allowed the dollar to weaken after the NFP miss was followed by an unusually high initial jobless claims figure. The combination signalled an early sign of easing in the labour market – something that could substantiate the view that US rates ought to be lowered if the data worsens from here.
However, the recent move was relatively sharp and next week’s lack of high importance data suggests that the dollar may return to favour. In lower volatility conditions, FX markets tend to flow towards higher yielding currencies. Suggesting EUR/USD may head lower in the week to come.
Keep an eye on channel support if the bearish move materializes, which may form an area of confluence support as the 1.0795 and 200-day simple moving average lie just beneath. If the current bullish move gains momentum, look for a break of channel resistance towards 1.0900. The pair nears overbought territory, reducing the likelihood of a sizeable advance next week.
EUR/USD Daily Chart
Source: TradingView, prepared by Richard Snow
EUR/GBP (Neutral): Crucial UK CPI Identified for its Potential to Surprise
EUR/GBP has revealed a tendency to surge higher only to retract back towards the trading range that persisted for a large part of 2024 thus far. The most resent rise took the pair just past the 200 SMA where numerous upper wicks hinted at a rejection of higher prices
EUR/GBP Daily Chart
Source: TradingView, prepared by Richard Snow
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Main Risk Events for the Week Ahead
High profile speakers come out in the week to come, both from the Fed and the BoE (Powell, Bailey). FOMC minutes may add to intra-day volatility and Europe receives flash PMI data for the month of May. PMI data in Europe has been recovering but the underlying economy remains lackluster. Then markets will be eager to find out if the final University of Michigan Consumer Sentiment figures will remain as concerning as initially thought when the flash figures were released.
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— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX