This article is a rewritten and expanded version of the original piece entitled “EUR/USD Forecast: Attention Turns to US Inflation and ECB Rate Decision,” authored by Fiona Cincotta and published by FOREX.com. The following analysis is intended to provide an in-depth perspective on current EUR/USD price action and broader macroeconomic factors influencing the currency pair.
EUR/USD Outlook: Focus Shifts to US Inflation and ECB Policy
The EUR/USD pair has seen significant movement in recent sessions, prompted by shifting expectations around monetary policy, uneven economic data, and increased market sensitivity to inflation metrics. Market participants are closely monitoring upcoming announcements from both sides of the Atlantic, including the European Central Bank’s (ECB) policy rate decision and the latest data on consumer price inflation from the United States.
After a period of relative calm, the EUR/USD exchange rate regained upward momentum and pushed towards a key technical resistance level, driven by a weakening US dollar and signs that the ECB might be preparing for a policy pivot of its own. Investors are now positioning ahead of two significant macroeconomic events: the US Consumer Price Index (CPI) data release for May and the ECB’s June monetary policy meeting.
Current Market Trends and EUR/USD Price Movement
The euro has found increasing support amid a moderate pullback in the dollar index (DXY), with traders engaging in cautious positioning ahead of Wednesday’s CPI release and the Thursday ECB meeting. The following are the most recent developments in the EUR/USD trade:
– The pair rose to test a multi-week high of approximately 1.09, buoyed by weakening demand for the dollar.
– Investor sentiment around the euro has improved as market participants anticipate a potentially more dovish tone from the Federal Reserve, even as the ECB gears up for its first rate cut.
– Technical support is currently seen around 1.0810, while resistance looms near 1.09.
Relationship Between US Inflation and Fed Outlook
The May US inflation report is scheduled for release just hours before the Federal Reserve’s upcoming meeting on Wednesday. Market participants are expecting the core CPI to rise by 0.3% month-over-month, which would translate into a year-over-year increase of approximately 3.5%. The headline CPI is forecast to climb by 0.1% on a monthly basis, leaving annual inflation at 3.4%.
– These figures remain well above the Federal Reserve’s 2% inflation target, presenting a challenge to any immediate interest rate cuts.
– Despite sticky inflation, signs of a cooling US labor market and softer consumer spending have raised expectations that the Fed may strike a more dovish tone.
– Fed officials are expected to maintain the current fed funds rate at its range of 5.25% to 5.50%.
This upcoming FOMC meeting will also feature updated economic projections and the release of the “dot plot,” which visualizes where policy members expect interest rates to head in the coming quarters.
Possible Impact of the Fed’s Decision and Inflation Data on EUR/USD
The twin events of CPI data and the Fed’s policy statement could meaningfully influence the trajectory of the US dollar, particularly if inflation surprises to the upside or downside. Several outcomes are possible:
– A hotter-than-expected inflation print could lead to speculation that the Fed will remain hawkish longer, potentially strengthening the US dollar and weighing down EUR/USD.
– Conversely, if inflation data cools more than forecasted and the Fed’s dot plot suggests a reduction in projected rate hikes, the dollar could weaken, giving the euro more room to rally.
Attention is focused on whether policymakers will reduce the number of expected interest rate cuts from their March forecast of three by the end of 2024. A revision down to two or even one could be interpreted as a signal that inflation continues to pose risks and that monetary policy will remain tight for longer than previously expected.
ECB Rate Decision: A Carefully Calculated Cut
The European Central Bank meets on Thursday, and markets widely expect the Governing Council to cut
Read more on EUR/USD trading.