Euro Heads Lower as ECB June Meeting Nears

Euro (EUR/USD, EUR/GBP) Analysis

ECB’s Lagarde “really confident” euro zone inflation is under control
EUR/USD succumbs to the grind lower during the quieter week
EUR/GBP sinks after hot UK CPI data unravels prior UK rate cut bets
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ECB Chief Expresses Confidence in the Fight Against Inflation

The European Central Bank (ECB) President Christine Lagarde communicated yesterday that she is “really confident” that euro zone inflation is under control. Lagarde’s words convey certainty and confidence – something that the Fed and Bank of England (BoE) appear to be moving further away from. Lagarde’s words contrast the most recent ECB statement that mentioned, ‘domestic price pressures are strong and are keeping services price inflation high’, putting up little resistance to a general decline in the euro.

Tomorrow’s German manufacturing PMI figure is unlikely to produce a massive market response as the manufacturing sector in Germany remains extremely subdued.

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ECB officials have been out in their droves talking up the likelihood of a rate cut in June but many have cautioned restraint in getting ahead of things thereafter. June may prove to be a ‘hawkish cut’ or a cut followed by a clear desire to implement a slow and steady approach to future rate cuts. Markets still price in two 25 basis point cuts with a decent chance of a third towards the end of the year (63 basis points in total).

Implied ECB Rate Cut Probabilities

Source: Refinitiv, prepared by Richard Snow

As we head closer to the ECB rate cut, the monetary policy divergence between the ECB and other major central banks is becoming more apparent. The Fed only recently snapped a multi-month trend of hotter-than-expected inflation and earlier this morning an inflation surprise in the UK for the month of April unraveled prior rate cut bets. Diverging expectations are continuing to have a negative effect on the Euro and this can also be seen but the most recent CoT data whereby long positioning has dropped while shorts have increased.

Commitment of Traders Report (CoT) Euro Speculative Non-Commercial Positioning

Source: Refinitiv, prepared by Richard Snow

EUR/USD succumbs to the grind lower during the quieter week

EUR/USD has pulled back from last week’s high and simultaneous touch of channel resistance as the quieter week naturally favoured a dollar recovery. The US dollar dropped notably after the lower CPI print and clawed back almost all of the loss this week with Thursday and Friday’s price action still to come.

The pair now tests channel support as the nearest obstacle to the shorter-term bearish move. The ascending channel remains intact, maintaining the broader EUR/USD uptrend.

In the event, the dollar recovers and EUR/USD falls further, the 1.0800 level and the 200-day simple moving average come into focus. However, a continuation of the broader uptrend sees 1.0900 emerge as the level of resistance. German manufacturing PMI and the University of Michigan Consumer Sentiment report appear as potential market movers for the pair into the end of the week.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

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EUR/GBP sinks after hot UK CPI data unravels prior UK rate cut bets

EUR/GBP has mad an impressive move lower on the back of UK CPI data this morning. Prices rose by less than expected and services inflation exceeded even the most pessimistic expectations, sounding the alarm and significantly trimming back rate cut bets.

EUR/GBP broke beneath trendline support but has pulled higher from the intra-day low to trade at the 0.8515 level. The 0.8515 level propped up prices in June and August 2023 and for the most part of 2024 as well. A daily close below 0.8500 would suggest the bearish momentum could extend to create a new yearly low. Resistance rests at the prior trendline support, now resistance. The RSI is fast approaching oversold territory, meaning bears may find it difficult to build momentum in the absence of a pullback.

EUR/GBP Daily Chart