The global financial markets are keenly awaiting the European Central Bank’s (ECB) monetary policy announcement scheduled for June 6th, 2024. Foremost on the minds of traders worldwide is the anticipated decision regarding the main refinancing rate and its potential ripple effects on the Euro (EUR) exchange rate, particularly against the US Dollar (USD). Currently set at 4.5%, all eyes are on whether the ECB will indeed implement the widely expected rate cut.
A Reuters poll, mirroring Bloomberg analyst surveys, suggests a near-unanimous expectation – 99.5% of market participants foresee a 25 basis point reduction in the main refinancing rate at this June meeting, bringing it down to 4.25%. This move would position the ECB ahead of the US Federal Reserve (FED) in easing monetary policy, as the FED has thus far remained cautious about initiating rate cuts. This divergence in monetary policy paths between the ECB and the FED is a critical factor influencing the EUR/USD exchange rate.
However, market consensus beyond June’s anticipated cut becomes less clear. Expectations for a July rate cut by the ECB are significantly lower, and views on further rate reductions throughout the remainder of 2024 are mixed. This uncertainty underscores the importance of the ECB’s upcoming monetary policy statement and the subsequent press conference led by President Christine Lagarde. Traders and analysts will be meticulously parsing the language used for clues about the ECB’s future policy trajectory.
Adding complexity to the ECB’s decision-making is the recent uptick in Eurozone inflation. May saw the Consumer Price Index (CPI) climb to 2.6% year-on-year (Y/Y), a rise from April’s 2.4%. Furthermore, core inflation figures, as reported by Eurostat, also surpassed forecasts. This inflationary pressure presents a challenge to the ECB’s dovish stance and raises questions about the extent and pace of future rate cuts beyond June. While the anticipated June cut appears largely priced in, the resurgence of inflation could temper expectations for aggressive easing later in the year. The May CPI increase was primarily fueled by rising housing, electricity, gas, and fuel costs. It’s worth noting that oil prices have since retreated somewhat from their peaks following the inflation data release. The current CPI level is now approaching the pre-pandemic average lows, suggesting inflation remains a persistent concern.
In the forex market, the EUR/USD pair has exhibited notable strength, rallying nearly 3% from its mid-April 2024 low of 1.0606. This upward momentum carried the pair to a high of 1.0915 before encountering selling pressure, which subsequently pulled the price back to the 1.0870 vicinity. Despite this recent pullback, the underlying uptrend in EUR/USD remains intact as traders position themselves ahead of the ECB meeting. However, the path higher is not without obstacles, as several key resistance levels loom ahead, potentially capping further gains in the short term.
The latest Commitment of Traders (COT) report, for the week ending May 31st, 2024 (data up to May 28th), provides further insights into market positioning. Asset Manager/Institutional and Leveraged Funds categories have shifted towards a net long position, after hovering near an intermediate-long extreme for several weeks. Conversely, commercial positioning has moved to a net short stance, aligning with the recent price action in EUR/USD.
EUR/USD Technical Analysis – Daily Chart
Examining the daily chart for EUR/USD reveals several key technical observations:
- Price action has decisively broken above and closed beyond the upper boundary of a narrowing chart formation. A subsequent throwback, or retest of this breakout level, occurred, accompanied by a shortfall as buyers stepped in above the weekly pivot point of 1.0797. This price behavior has carved out an intermediate double bottom formation situated above the breakout level, reinforcing the bullish momentum.
- Following the double bottom, price action successfully breached the resistance level associated with this formation and has since attempted another throwback towards the breakout point. This indicates the market is testing the strength of the newly established support.
- A confluence of support factors is currently clustered within the 1.0840-1.0860 area. This support zone is comprised of the weekly pivot point, a monthly support level, the 9-day Simple Moving Average (SMA9), and the 9-day Exponential Moving Average (EMA9). This robust support zone suggests strong buying interest should price retrace to these levels.
- EUR/USD continues to trade comfortably above its EMA9, SMA9, and SMA21, further confirming the prevailing uptrend.
- The non-smoothed 7-day Relative Strength Index (RSI7) is in alignment with price action and is currently positioned near its neutral level, indicating there is room for further momentum in either direction without being in overbought or oversold territory.
- Intriguingly, a potential triple bottom formation can be identified within the previously mentioned narrowing chart pattern (highlighted by blue circles on the chart). Should the current breakout remain valid, traders will be closely monitoring for the potential completion of this triple bottom pattern, which would further solidify the bullish outlook for EUR/USD.
Weekly Chart Update
On the weekly timeframe, EUR/USD broke below and remained below the lower trendline of an ascending channel. A pullback to this broken trendline has since materialized, and price action has retraced back to this key level. This level, unchanged from the previous week’s analysis, remains critical. Monitoring price behavior around this broken trendline will be crucial to gauge the longer-term trajectory of EUR/USD.
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