The EUR/USD pair exhibited a modest uptick of approximately 0.1% during the early European session on Tuesday, following the release of unrevised German inflation data that aligned with preliminary estimates.
Traders are currently honing in on the eagerly awaited US Consumer Price Index (CPI) inflation data scheduled for 12:30 GMT, as it could play a pivotal role in determining the Federal Reserve’s (Fed) approach to interest rates. A lower-than-expected inflation figure may expedite the Fed’s policy adjustment, potentially exerting downward pressure on the US Dollar, as reduced interest rates often attract fewer foreign capital inflows.
Market Anticipation of US CPI Release
Market sentiment is on edge ahead of the US CPI release, which is poised to significantly impact the EUR/USD pair. Economists anticipate a moderation in the US Consumer Price Index ex Food and Energy to 3.7% YoY in February, down from 3.9% in January, with a projected 0.3% MoM gain from the previous 0.4%. The broader headline CPI figure is forecasted to exhibit a 3.1% YoY rise in February, unchanged from the preceding month, and a 0.4% MoM increase from January’s 0.3%.
CME FedWatch Tool calculations reveal a 3% probability of a first cut in March, 17.1% likelihood of one or more 25 bps cuts by May, and a substantial 71.4% probability of one or more cuts by June. Overnight, probabilities for May experienced a notable decrease from over 30% on Monday.
BNY Mellon Strategist Predicts Euro Weakness
BNY Mellon strategist Geoffrey Yu suggests that the Euro is overpriced, considering the Eurozone’s comparatively weaker growth and the potential for earlier rate cuts in Europe compared to the US. Yu anticipates the Euro weakening against the US Dollar in 2024, expressing the view that parity with the Dollar may be reached at some point this year. The strategist attributes this anticipated weakness to a dual impact from a struggling economy and the European Central Bank (ECB) potentially cutting interest rates before the Fed.
Recent comments by Banque de France Governor François Villeroy de Galhau and Bundesbank President Dr. Joachim Nagel, suggesting a rate cut in the spring, have added to the Euro’s challenges. Despite ECB President Christine Lagarde’s more conservative stance, stating June as the time for the ECB to review its interest rate policy, analysts note the potential for increased pressure on the Euro.
Technical Analysis: EUR/USD Correction
While the EUR/USD pair has retraced from its March 8 peak of 1.0981, the short-term uptrend remains intact on the 4-hour chart. Consistent higher highs and higher lows signal a favorable trend for bullish positions, despite the recent correction.
