In Thursday’s European trading session, the EUR/USD pair extended its decline below the critical support level of 1.0800, succumbing to intense selling pressure. The downward trajectory comes amidst a strengthening US Dollar (USD) fueled by cautious market sentiment. The US Dollar Index (DXY), tracking the Greenback’s performance against a basket of major currencies, surged to a two-week peak, hovering slightly above 105.00.
Investors are flocking to the US Dollar on the belief that the Federal Reserve (Fed) is unlikely to entertain interest rate cuts in the near term. Fed policymakers have articulated their preference for a prolonged period of subdued inflation to ensure a sustainable return to the desired inflation rate of 2%.
Although Fed officials perceive further rate hikes as less probable, they have not ruled out the possibility entirely, indicating a cautious stance on future monetary policy adjustments. Market attention now shifts to the release of the United States core Personal Consumption Expenditure Price Index (PCE) data for April, scheduled for Friday, which is expected to heavily influence speculation regarding Fed rate cuts in September. Analysts anticipate steady growth in both annual and monthly core PCE inflation readings, projected at 2.8% and 0.3%, respectively.
In a broader market perspective, EUR/USD exhibited considerable weakness, plummeting below the psychologically significant level of 1.0800. Market participants anticipate a weakening Euro against the US Dollar, given the European Central Bank‘s (ECB) potential decision to commence interest rate reductions starting from the June meeting, in contrast to the uncertain timing of rate adjustments by the Fed.
ECB policymakers appear comfortable with the prospect of policy normalization commencing in June, buoyed by a decline in the Eurozone’s core inflation to 2.7% and renewed progress in service disinflation following a stall between November and March.
Looking ahead, speculation surrounding the ECB’s rate-cut trajectory beyond June will likely shape the Euro’s future movements. While current market expectations suggest one more rate cut by the ECB this year, a recent Reuters poll of economists hints at the possibility of two rate cuts.
Technical analysis indicates a bearish reversal for EUR/USD, with the pair registering a fresh swing low below the May 23 low of 1.0800. Failure to sustain an upward trajectory after a Symmetrical Triangle chart pattern breakout suggests a potential return to the pattern’s upward-sloping border. Moreover, the breach below the 20-day and 50-day Exponential Moving Averages (EMAs) indicates a shift in the near-term trend towards bearish territory. The 14-period Relative Strength Index (RSI) further reinforces this sentiment by entering the 40.00-60.00 range, signaling waning upside momentum.
