The value of the euro declines against the US dollar as policies between the European Central Bank and the Federal Reserve continue to diverge. Recent statements by European Central Bank President Christine Lagarde on low inflation reflect a trend towards a possible cut in interest rates, which has also been echoed by other ECB officials.
Attention now turns to key US economic data ahead of the Fed meeting, increasing the odds of the EURUSD downtrend worsening. The euro continues to decline against the US dollar as policies continue to diverge between the two central banks.
This increasing spread leads to significant changes in market expectations about future interest rates. While the European Central Bank made no change in interest rates at its last meeting, comments from officials show a clear shift in fiscal policy.
Lagarde’s statement signals a period of low inflation and predicts possible future interest rate cuts, while comments from other ECB officials reflect increased caution earlier this week.
In light of this scenario, some officials are proposing interest rate cuts as early as June, while others are hinting at the possibility of bolder moves, perhaps as much as 100 basis points, exceeding previous expectations.
These changes in expectations of interest rate cuts lead to a further decline in the value of the euro. Now, the market is anticipating the first rate cut by the Fed in September, reflecting a significant lag from previous expectations for June.
At the same time, the European Central Bank is showing increasing pessimism, with some officials pointing to the possibility of interest rate cuts starting as early as June. This divergence in central bank policy is a major reason why the euro’s decline has deepened.
The impact of expectations of interest rate cuts on eurodollar trading
EURUSD traders are eagerly awaiting the release of the Purchasing Managers’ Index (PMI) data, as the Euro Composite PMI is expected to rise to 50.8 from 50.3. Analysts expect the US PMI data to shed light on the economic strength of the US economy.
EURUSD is consolidating at 1.0650, while the manufacturing PMI came in below expectations at 42.2, indicating continued contraction and no expansion. Experts expect an improvement in the Eurozone PMI data, which will reflect positively on the services and manufacturing sectors, and support the idea of recovering the European economy from the slowdown.
Fed officials have adopted a more hawkish stance, highlighting the strength of the US economy and steady inflation as reasons to be patient with interest rate cuts.
Recent statements by European Central Bank President Christine Lagarde on low inflation reflect a trend towards a possible cut in interest rates, which has also been echoed by other ECB officials.
However, the euro’s progress may be limited given expectations of interest rate cuts by the European Central Bank in June, which is inconsistent with the Fed’s policy. Fed officials are adopting a more hawkish stance, highlighting the strength of the US economy and stable inflation as reasons to encourage patience with interest rate cuts.
Strong US PMI data is expected to confirm rapid growth in the manufacturing and services sectors in April, supporting the positive outlook on the US economy and indicating the need for an interest rate cut in the near future, which will reinforce the strength of the US dollar.
This data comes in the context of other data expected later in the week, such as US GDP and core personal consumption expenditures numbers, which may provide us with additional indicators about the future direction of the Fed’s interest policy.
EURUSD trading and the impact of major awaited economic data
There are key economic data expected before the Fed meeting, which could influence the EURUSD pair. This week’s economic calendar includes several key data from the US that could influence the movement of the EURUSD pair ahead of the crucial Fed meeting on May 1.
Among the eagerly anticipated data is the GDP report, which is expected to show a slight decline compared to the previous period, but this does not necessarily mean an economic recession is approaching.
Friday brings crucial data on the personal consumption expenditures index, and barring unexpected surprises, these data are not expected to show a slowdown in the decline in inflation.
If these readings confirm the trend of slowing inflation, it will provide additional impetus for the EURUSD pair to decline.
Although the data will be released this week, the primary focus remains on the upcoming Fed meeting.
The Fed’s decisions will have a significant impact on the path of the EURUSD pair. Indeed, with the euro approaching the critical support level at $1.05, a hawkish stance from the Fed could push the pair further lower.
Changes in interest rate cut expectations are dragging the euro lower, as the market now expects the Fed to begin cutting interest rates in September, a significant delay from what was expected the previous June, according to the Fed’s interest rate watcher.
At the same time, the European Central Bank is showing increasing pessimism, with some officials proposing to start interest rate cuts as early as June, further exacerbating the euro’s slide.
The most anticipated data point is the GDP report, which, if forecasts hold, will show a slight decline compared to the previous quarter, but does not necessarily indicate an impending recession.
EURUSD forecasts and the impact of economic data and US bond yields
The EURUSD pair is currently showing signs of the downtrend slowing, with a corrective pattern resembling a prominent flag forming.
Strong data from the US, confirming continued inflation and strong growth, remains stimulating for the dollar. This backdrop, combined with heavy supply coming from the US Treasury, supports upward pressure on US bond yields, which is positive for the dollar. We see that although monetary easing expectations were revised strongly this month, there is room for additional upside, especially with the Fed expected to impose tighter policy in the future.
US bond yields remain trading higher ahead of the next bumper show. The two-year yield is trading at 4.99%, on track to test the October high near 5.26%, while the 10-year yield is trading near 4.61% and on track to test October yields. High near 5.02% Abundant supply may help push US bond yields higher, with supply totaling $183 billion in 2-, 5- and 7-year bonds this week. Auctions continue tomorrow with 5-year bonds worth $70 billion, and end on Thursday with 7-year bonds worth $44 billion.
Regarding the analysis of the EURUSD pair, the pair has continued its rise from the low of 2024. A break at this level requires a further rise towards 1.0725, the December low, exposing the 200 SMA at 1.0820.
Failure to rise above 1.0725 could lead to a retest of support at 1.0640, the May 2023 low, followed by the 2024 low. If this level is broken, a new low may be created.
