In the European session on Monday, EUR/USD struggled to maintain levels above 1.0850 as it faced downward pressure. This came in the wake of the revised HCOB Manufacturing Purchasing Managers Index (PMI) indicating a slight drop in factory data to 47.3, slightly below both the consensus and preliminary reading of 47.4.
Investor attention is now directed towards the European Central Bank‘s (ECB) upcoming interest rate decision scheduled for Thursday. There’s a prevailing anticipation in financial markets for a 25 basis points (bps) cut in the ECB’s Main Refinancing Operations Rate to 4.25%. However, focus also extends beyond June’s meeting as market participants seek clues regarding potential future rate-cut trajectories.
Initial expectations for subsequent rate cuts in the July meeting have somewhat diminished following Eurozone’s preliminary Harmonized Index of Consumer Prices (HICP) report for May, indicating a potentially arduous journey towards achieving the 2% inflation target.
Eurostat’s report on Friday highlighted a faster-than-expected growth in annual preliminary Eurozone HICP for May. Headline HICP rose by 2.6%, surpassing estimates of 2.5% and April’s reading of 2.4%. Similarly, core HICP data accelerated to 2.9% from expectations of 2.8% and the previous reading of 2.7%, excluding volatile components such as food, energy, alcohol, and tobacco.
Market Analysis and Outlook
EUR/USD witnessed a decline amidst cautious sentiment ahead of the ECB’s interest rate decision and the release of the United States Nonfarm Payrolls (NFP) report for May on Thursday and Friday respectively. The NFP report is expected to offer insights into potential timing for Federal Reserve (Fed) interest rate adjustments.
Speculation regarding a Fed rate cut in the September meeting has increased to 52%, up from 49% recorded a week earlier, as indicated by the CME FedWatch tool. This speculation gained momentum following the release of the Personal Consumption Expenditures Price Index (PCE) report, revealing a slowdown in Personal Spending growth to 0.2% in April.
Technical Analysis
EUR/USD dropped to 1.0835 after failing to sustain above the crucial support level of 1.0850. Despite consolidating within a tight range of 1.0788-1.0900 over the last three weeks, indicating reduced volatility, the asset maintains an upside bias.
The near-term outlook remains favorable with the 50-day Exponential Moving Average (EMA) sloping higher near 1.0800.
The 14-period Relative Strength Index (RSI) indicates fading momentum in the upside direction, hovering within the 40.00-60.00 range.
A break above 1.0900 could propel the asset towards the March 21 high around 1.0950 and the psychological resistance of 1.1000. Conversely, a move below the 200-day EMA at 1.0800 could lead to further downside pressure.
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