Euro Analysis: (EUR/USD, EUR/GBP, EUR/CHF)
UK data returns to prominence this week with headline and core inflation expected to build on progress made in April but the Bank of England (BoE) remain laser focused on services inflation. Not long after UK CPI we have the BoE statement and press conference. Market consensus dictates that we’ll see another hold from the Bank but recent easing in the jobs market coupled with a stagnant economy in April could see the Monetary Policy Committee (MPC) tee up a rate cut for the summer.
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Alongside the BoE decision on Thursday, we’ll also get the Swiss National Bank rate decision. Markets expect another cut following the surprise cut in March, but Chairman Thomas Jordan has complicated this view after he mentioned the biggest threat to the inflation outlook is a weaker franc. Lower interest rates generally precede a period of depreciation in the local currency.
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EUR/USD Encapsulates the Forces of a Stronger USD and Weaker Euro
Euro dollar experienced a volatile week initially rising after encouraging US CPI data but then upward revisions to both the Fed funds and inflation outlooks spurred on the US dollar into the weekend.
The pain encapsulates 2 forces at work with the first being a stronger U.S. dollar upon recent Fed forecast revisions, and the second being a vulnerable euro in the wake of political uncertainty in France. We’ve seen a flight to safety in the European bond market led by German Bunds – inflating the risk premium across Europe which historically has led to a weaker currency.
This week we look to the 1.0700 for a potential pause in recent selling. Neither of the two currencies have major data releases planned for the week, offering up the potential for a reprieve for EUR/USD although, the RSI has not yet reached oversold conditions – something bears will be aware of. The pair will likely take its cue from political developments and the bond market this week.
EUR/USD Daily Chart
Source: TradingView, prepared by Richard Snow
Bank of England to Tee up a Rate Cut this Summer?
It is largely expected that the Bank of England will vote to keep rates on hold this week despite recent encouraging inflation numbers and unimpressive growth data for April. Adding to the list is the recent spike in claimant data (initial jobless claims) to levels not seen since early 2021.
Unlike the US, the UK labour market has been easing in a fairly consistent manner which is something that will factor into the Bank’s thinking this week. However, services inflation is still too high for comfort and BOE officials have communicated their determination in maintaining restrictive monetary policy until such time as it subsides sufficiently.
Looking at the implied interest rate cuts for the rest of the year the market may be under appreciating the probability of a rate cut before November or even September. At present, a rate cut at the November meeting is fully priced in with the September meeting eyed as a strong possibility.
Implied Interest Rate Probability (UK Bank Rate)
Source: Refinitiv, prepared by Richard Snow
EUR/GBP has depreciated quite markedly in the last few weeks as the pound has quietly gone about its business and enjoyed its superior interest rate differential. The pair broke below 0.8472 last week – a notable pivot point. The pair is likely to be watched closely in the runup to the French elections continues alongside top tier UK data/events.
0.8340 is the next level of support which may require a pullback before another leg to the downside. A retest and rejection of 0.8472 may keep bears interested. However, should the BoE alter its messaging to accommodate a more dovish view on rates, market pricing will have to adjust – leaving sterling vulnerable. EUR/GBP levels to the upside include 0.8515 followed by 0.8560. The RSI on the daily chart has recovered from oversold territory – potentially extending the counter-trend move at the start of the week.
EUR/GBP Weekly Chart
Source: TradingView, prepared by Richard Snow
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Will the SNB Cut Again Despite Chairman Jordan’s Currency Comments?
EUR/CHF will be in focus this week as the Swiss National Bank (SNB) is due to meet this week. Markets factor in a 70% chance of another rate cut but the Chairman Thomas Jordan mentioned recently that the biggest threat to the inflation outlook is a weaker franc, which resulted in massive appreciation of the currency and runs the risk of the Bank ultimately deciding to hold rates at 1.5% to prop up the value of the franc.
The pair rests at 0.9516 with little in the way between current ricing and the late December swing low at 0.9255. The pair appears to be recovering from oversold territory, meaning the counter-trend move may extend slightly until the SNB announcement.
EUR/CHF Daily Chart
Source: TradingView, prepared by Richard Snow
— Written by Richard Snow for DailyFX.com
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