In Monday’s European session, the EUR/USD pair remained ensnared within a tight range near 1.0850, marking a tranquil start to the week ahead of the impending release of inflation data on both sides of the Atlantic come Friday.
The major currency pair displayed resilience as European Central Bank (ECB) policymakers refrained from committing to extending the rate-cut cycle beyond the upcoming June meeting. Concerns linger among ECB policymakers that aggressive policy easing could reignite inflationary pressures, prompting a cautious approach.
Traders have tempered their expectations of three rate cuts this year, now anticipating only two, owing to recent economic indicators hinting at lingering price pressures. These indicators include Negotiated Wage Rates for the first quarter and preliminary HCOB Composite Purchasing Managers Index (PMI) data for May.
While higher wage growth typically fuels inflationary pressures by bolstering consumer spending, ECB board member and Bundesbank President Joachim Nagel downplayed its impact, deeming it a lagging indicator with a soft long-term trend.
On the economic front, German IFO data on Business Climate, Current Assessment, and Expectations for May have been released. Despite the data slightly missing estimates, the Euro remained largely unchanged.
The German IFO Business Climate Index dipped marginally to 89.3 from April’s 89.4, falling short of the forecasted rise to 90.3. Similarly, the Current Economic Assessment Index slipped to 88.3 from 88.9, below the consensus of 89.9. The IFO Expectations Index, indicating firms’ outlook for the next six months, came in at 90.4, slightly lower than the expected 90.5 but higher than the previous reading of 89.7.
Looking ahead, EUR/USD is anticipated to maintain its sideways movement as trading volume remains thin due to the Memorial Day holiday in United States markets. However, heightened volatility is expected later in the week with the release of preliminary inflation data for May by Eurostat and the core Personal Consumption Expenditure Price Index (PCE) data for April by the United States Bureau of Economic Analysis (BEA), both scheduled for Friday.
Investor focus will be on the Eurozone inflation data as ECB policymakers gear up for their June monetary policy meeting, with a rate cut widely anticipated. Although ECB officials are comfortable with market speculation regarding a return to policy normalization, they remain data-dependent and cautious.
Meanwhile, the US Dollar steadied in the early European session following a sharp decline on Friday. The US Dollar Index (DXY) retreated to 104.65, despite growing doubts about the Federal Reserve (Fed) initiating interest rate cuts in September.
Market sentiment, reflected in the CME FedWatch tool, indicates a slight shift towards expectations of the central bank maintaining interest rates unchanged in September, up from the previous week. This adjustment follows a robust preliminary US PMI report for May, influencing speculation regarding Fed rate cuts.
The upcoming core PCE inflation data will provide further insight into market expectations for Fed rate adjustments in September, with earlier CPI data suggesting a cooling of price pressures after a strong first quarter. This potential softening in the core PCE, the Fed’s preferred inflation gauge, could further shape market sentiments towards monetary policy decisions.
