Euro exchange rate outlook: The euro exchange rate is falling as the ECB’s June meeting approaches

Euro (EUR/USD, EUR/GBP) analysis

  • Inflation in the eurozone, of which Lagarde is ‘very sure’, is under control
  • EUR/USD buckles under pressure during quieter week
  • EUR/GBP falls after UK CPI data unravels previous bets on the UK rate cut
  • EUR/U.S. dollar is one of the most liquid currency pairs in the world, offering short-term trading with a cost-effective and convenient trading market. Discover the real benefits of trading liquid pairs and which pairs qualify:

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ECB chief expresses confidence in the fight against inflation

The President of the European Central Bank (ECB), Christine Lagarde, communicated yesterday that she has “really confidence” that inflation in the eurozone is under control. Lagarde’s words convey certainty and confidence – something the Fed and the Bank of England (BoE) seem to be increasingly further away from. Lagarde’s words are in stark contrast to the ECB’s most recent statement which said: “Domestic price pressures are strong and are keeping service price inflation high,” leaving little resistance to a general decline in the euro .

Tomorrow’s German manufacturing PMI figure is unlikely to trigger a massive market reaction as Germany’s manufacturing sector remains extremely weak.

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ECB officials have widely discussed the likelihood of a rate cut in June, but many have warned against caution in anticipating things beyond that. June could prove to be a ‘hawk-like cut’, or a cut followed by a clear desire to implement a slow and steady approach to future rate cuts. Markets are still pricing in two cuts of 25 basis points, with a decent chance of a third by the end of the year (63 basis points in total).

Implicitly ECB rate Lower the odds

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Source: Refinitiv, prepared by Richard Snow

As we get closer to the ECB’s rate cut, the difference in monetary policy between the ECB and other major central banks is becoming increasingly clear. The Fed only recently broke a multi-month trend of higher-than-expected inflation, and earlier this morning an inflation surprise in Britain for April unraveled previous rate cuts. Divergent expectations continue to have a negative impact on the euro and this is visible, but the latest CoT data shows that long positioning has fallen while shorts have increased.

Commitment of Traders Report (CoT) Speculative non-commercial positioning in the euro

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Source: Refinitiv, prepared by Richard Snow

EUR/USD buckles under pressure during quieter week

EUR/USD has retreated from last week’s high and concurrent touch of channel resistance, as the quieter week naturally favored a dollar recovery. The US dollar fell significantly following the lower CPI print, recouping almost all of this week’s losses, with Thursday and Friday’s price action still to come.

The pair is now testing channel support as the nearest obstacle to the shorter-term bearish move. The rising channel remains intact and maintains the broader EUR/USD uptrend.

In the event that the dollar recovers and the EUR/USD falls further, the 1.0800 level and the 200-day simple moving average come into focus. However, if the broader uptrend continues, 1.0900 emerges as the resistance level. The German Manufacturing PMI and the University of Michigan’s Consumer Sentiment report appear to be potential market drivers for the pair through the end of the week.

EUR/USD daily chart

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Source: TradingView, prepared by Richard Snow

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EUR/GBP falls after UK CPI data unravels previous bets on the UK rate cut

EUR/GBP has made an impressive decline this morning thanks to UK CPI data. Prices rose less than expected and inflation in the services sector exceeded even the most pessimistic expectations, raising alarms and significantly scaling back interest rate cuts.

EUR/GBP broke below the trendline support but has risen from intraday lows and is trading at the 0.8515 level. The 0.8515 level supported prices in June and August 2023 and also for most of 2024. A daily close below 0.8500 could indicate that bearish momentum could extend and set a new annual low to create. The resistance rests on the previous trendline support, now resistance. The RSI is quickly approaching oversold territory, meaning bears may find it difficult to build momentum in the absence of a pullback.

EUR/GBP daily chart

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Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

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