Euro (EUR/USD, EUR/GBP) Analysis
- US CPI forces markets to recalibrate rate cut expectations
- US CPI beat sends EUR/USD lower – next level of support at 1.0700
- EUR/GBP trades within familiar range
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US CPI Forces Markets to Recalibrate Rate Cut Expectations
US CPI beat estimates across all major measures in March. Headline inflation rose from 3.2% to 3.5% with the month-on-month measure beating estimates to come in at 0.4%. Core inflation remained at 3.8% but beat estimates of 3.7%, also rising 0.4% on the month.
Successive month-on-month rises in inflation makes it difficult for the Fed to point to seasonality in the data as the reason for the rise now that we’ve received three months’ worth of data already.
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The ECB is largely expected to use the platform of the April meeting to point towards the start of the rate cutting process in June. Notable ECB officials have already communicated this timeline and therefore tomorrow’s announcement carries the risk that it may not be a huge market mover.
Market Implied Probabilities of rate cuts (shown in basis points, bps)
Source: Refinitiv
Instead, markets may look for subtle clues on future policy via questions fielded to Christine Lagarde in the press conference following the announcement.
The June meeting will also come with updated staff projections which is likely to provide greater confidence to the governing council about the rate cut. Recent progress on inflation aligns with the notion of policy normalization and serves to motivate the committee to cut rates sooner than later.
US CPI Beat Sends EUR/USD Lower – Next Level of Support at 1.0700
EUR/USD sank immediately after the hot CPI print as markets reigned in Fed cut odds, strengthening the dollar and weighing on EUR/USD. The euro has traded in a fairly robust manner despite recent drops in EU inflation – adding pressure on the ECB to cut rates.
EUR/USD tests the 38.2% Fibonacci retracement of the 2023 decline at 1.0765, with a potential to head towards the psychological 1.0700 level. The bearish impulse follows the more medium-term move that began when the pair found resistance around 1.0950.
EUR/USD Daily Chart
Source: TradingView, prepared by Richard Snow
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EUR/GBP Trades Within Familiar Range
EUR/GBP pushed lower after attempting to break above the trading range (orange rectangle). FX volatility has been lacking in 2024, meaning breakout attempts have failed to receive the necessary follow through to make a move stick.
However, recent inflation dynamics and nearing interest rate cuts may change that. Divergence is appearing in economic data between the US and Europe but also the UK. With the EU and the UK expecting similar paths of lower inflation, the two are likely to continue to oscillate without a clear directional move for now.
Immediate support appears at 0.8560 followed by 0.8515. Resistance lies back at 0.8578 – the upper bound of the range.
EUR/GBP Daily Chart
Source: TradingView, prepared by Richard Snow
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
