In Tuesday’s European session, the EUR/USD pair reached a fresh weekly high at 1.0880, buoyed by a weakening US Dollar (USD) and mounting uncertainty surrounding the European Central Bank‘s (ECB) monetary policy stance post-June.
The US Dollar Index (DXY), reflecting the USD’s performance against a basket of six major currencies, extended its decline to 104.40. Despite diminished expectations of Federal Reserve (Fed) interest rate cuts in September, the greenback continued to face pressure. According to the CME FedWatch tool, the likelihood of the Fed maintaining its current policy framework in September has risen to 50%, up from approximately 35% a week earlier.
Traders adjusted their rate hike expectations amidst a robust US economic outlook and policymakers’ hawkish stance on interest rates. Market focus this week centers on the core Personal Consumption Expenditure price index (PCE) data for April, scheduled for release on Friday. Consensus forecasts suggest stability in both monthly and annual core PCE inflation figures, which serve as the Fed’s preferred inflation gauge.
EUR/USD maintained its upward momentum for the third consecutive trading day, reaching 1.0880. The euro found support amid deliberations over the ECB’s approach to interest rate cuts post-June. Market participants anticipate an interest rate reduction at the ECB’s monetary policy meeting on June 6, with discussions revolving around the extent and pace of monetary easing thereafter.
ECB policymakers have refrained from committing to a predetermined rate-cut trajectory, opting instead for a data-dependent approach. Recent remarks from ECB officials have influenced market sentiment, with some policymakers cautioning against aggressive policy easing, citing potential repercussions on inflation. Expectations have shifted, with investors now projecting one additional rate cut by the ECB following the June meeting, compared to earlier forecasts of three rate cuts in 2024.
François Villeroy de Galhau, ECB policymaker and Governor of the French central bank, affirmed the likelihood of a June rate cut but emphasized the importance of maintaining flexibility regarding timing and pace. ECB Chief economist Philip Lane highlighted the significance of underlying inflation demand in determining the pace of rate reductions.
Looking ahead, market focus turns to Eurozone preliminary inflation data for May, set for release on Friday, which will provide insights into the ECB’s future monetary policy decisions. Additionally, investors await Germany’s preliminary May inflation figures, expected to influence near-term market sentiment.
