In Thursday’s European trading session, the EUR/USD pair maintains its position, consolidating just below the key resistance level of 1.0900. Market sentiment remains cautious as investors await the European Central Bank‘s (ECB) monetary policy decision, scheduled for announcement at 12:15 GMT.
Anticipation surrounds the ECB’s decision, with expectations of potential shifts in the Eurozone’s economic outlook and subsequent impacts on the Euro’s trajectory. While there’s anticipation of a 25 basis points cut in the Deposit Facility Rate, ECB policymakers have refrained from outlining a definitive policy path beyond June due to ongoing concerns regarding inflation.
The journey towards achieving the central bank‘s target inflation rate of 2% faces challenges, notably stemming from persistent service inflation influenced by wage growth, despite improved economic prospects in the Eurozone. May witnessed a notable rise in service inflation to 4.1%, the highest in seven months, alongside a positive growth trajectory in Gross Domestic Product (GDP), expanding by 0.3% after two consecutive quarters of contraction in 2023.
In terms of interest rate projections, ECB officials maintain a data-dependent stance, refraining from committing to future rate-cut decisions beyond the immediate horizon. Financial markets, however, anticipate two additional rate cuts by the end of the year.
Meanwhile, the broader market narrative sees the USD weakening, evidenced by the retreat of the US Dollar Index (DXY) from the pivotal resistance level of 104.40. Despite robust data from the US Institute for Supply Management’s Services Purchasing Managers Index (PMI) report for May, indicating expansion, the US Dollar’s decline persists. Easing labor market conditions, as reflected in the US JOLTS Job Openings data for April and ADP Employment Change for May, have further fueled expectations of potential interest rate cuts by the Federal Reserve, with the CME FedWatch tool indicating a 68% likelihood of rate reduction by September.
Looking ahead, investor focus shifts to the forthcoming US Nonfarm Payrolls (NFP) data for May, expected to provide insights into labor market dynamics. Technically, the EUR/USD pair hovers near the 1.0885 resistance, with potential for bullish reversal upon breaching the 1.0900 level, while downside risks loom below the 200-day EMA at 1.0800.
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