Euro (EUR/USD, EUR/GBP) Analysis
- ECB’s Lagarde “really confident” euro zone inflation is under control
- EUR/USD succumbs to the grind lower during the quieter week
- EUR/GBP sinks after hot UK CPI data unravels prior UK rate cut bets
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ECB Chief Expresses Confidence in the Fight Against Inflation
The European Central Bank (ECB) President Christine Lagarde communicated yesterday that she is “really confident” that euro zone inflation is under control. Lagarde’s words convey certainty and confidence – something that the Fed and Bank of England (BoE) appear to be moving further away from. Lagarde’s words contrast the most recent ECB statement that mentioned, ‘domestic price pressures are strong and are keeping services price inflation high’, putting up little resistance to a general decline in the euro.
Tomorrow’s German manufacturing PMI figure is unlikely to produce a massive market response as the manufacturing sector in Germany remains extremely subdued.
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ECB officials have been out in their droves talking up the likelihood of a rate cut in June but many have cautioned restraint in getting ahead of things thereafter. June may prove to be a ‘hawkish cut’ or a cut followed by a clear desire to implement a slow and steady approach to future rate cuts. Markets still price in two 25 basis point cuts with a decent chance of a third towards the end of the year (63 basis points in total).
Implied ECB Rate Cut Probabilities
Source: Refinitiv, prepared by Richard Snow
As we head closer to the ECB rate cut, the monetary policy divergence between the ECB and other major central banks is becoming more apparent. The Fed only recently snapped a multi-month trend of hotter-than-expected inflation and earlier this morning an inflation surprise in the UK for the month of April unraveled prior rate cut bets. Diverging expectations are continuing to have a negative effect on the Euro and this can also be seen but the most recent CoT data whereby long positioning has dropped while shorts have increased.
Commitment of Traders Report (CoT) Euro Speculative Non-Commercial Positioning
Source: Refinitiv, prepared by Richard Snow
EUR/USD succumbs to the grind lower during the quieter week
EUR/USD has pulled back from last week’s high and simultaneous touch of channel resistance as the quieter week naturally favoured a dollar recovery. The US dollar dropped notably after the lower CPI print and clawed back almost all of the loss this week with Thursday and Friday’s price action still to come.
The pair now tests channel support as the nearest obstacle to the shorter-term bearish move. The ascending channel remains intact, maintaining the broader EUR/USD uptrend.
In the event, the dollar recovers and EUR/USD falls further, the 1.0800 level and the 200-day simple moving average come into focus. However, a continuation of the broader uptrend sees 1.0900 emerge as the level of resistance. German manufacturing PMI and the University of Michigan Consumer Sentiment report appear as potential market movers for the pair into the end of the week.
EUR/USD Daily Chart