FOREX Fundamental analysis for EUR/USD on May 28, 2024
EUR/USD sellers hoped that the earlier easing of the ECB's monetary policy compared to the Fed and its significant scale would create a significant advantage for the dollar. However, Philip Lane, the ECB's chief economist, thinks otherwise. In his opinion, a significant weakening of the euro is necessary to accelerate inflation in the Eurozone, which is unlikely due to the narrowing of the gap in economic growth between the United States and the Euro Bloc. This statement caused confusion in the pro-dollar camp.
Last week, slowing inflation and disappointing retail sales data turned asset managers and hedge funds away from the dollar. Their combined net long position on the US dollar against major world currencies of $2.02 billion was transformed into net shorts of $5.36 billion. Commonwealth Bank of Australia predicts that these positions will increase as the date of the first Fed rate cut approaches
Interestingly, the largest capital inflows from leaving the dollar are directed to the pound and the euro, which are pro–cyclical currencies that benefit from synchronizing the growth of the global economy and reducing the influence of the factor of American exceptionalism.
Philip Lane's comments had a greater impact on positioning in forex currency trading than the slowdown in the German business climate according to the IFO, indicating that the cyclical bottom of the German economy will not be followed by an automatic strong recovery. And, even more important than the "dovish" rhetoric of the head of the Bank of France, Francois Villaroy de Galo, who does not rule out a further reduction in the deposit rate in July after the June expansion.
Philip Lane noted that the slowdown in the Eurozone economy is due to the negative impact of the war in Ukraine and the energy crisis, which the United States did not feel. He believes that the rapid decline in European inflation to the target level of 2% indicates the effective work of the ECB. This calls into question the effectiveness of the Fed and is bad news for the EUR/USD bears.
The ECB's further plans after the June rate cut will depend on the data. Lane said that if inflation starts to accelerate, monetary policy easing will be slower. In the context of the increase in consumer price growth in the Eurozone predicted by Bloomberg experts in May, this statement looks like a call for EUR/USD bulls to take action.
Recently, the futures market was confident of three acts of ECB monetary expansion in 2024, now only two are expected. The divergence in the monetary policy of the Eurozone and the Fed is not so significant as to stop the EUR/USD rally. Our forex trading strategy is the same - we buy and increase long positions formed from the levels of 1,073 and 1,083. The goal remains the same – 1,108.