FOREX Fundamental analysis for EUR/USD on June 13, 2024
The Federal Reserve System (Fed) in its updated forecasts points to one reduction in the federal funds rate in 2024, urging "trust, but check." The market, responding to the same principle, continues to believe in two acts of monetary expansion after the release of the May inflation report in the United States. In an environment where monetary policy depends on data, statistics become the main factor of influence. However, this time the market reacted unexpectedly, causing fluctuations in the EURUSD rate.
Reaction to inflation data
The absence of an increase in core inflation with an increase in consumer prices by 0.16% (mom) has energized the bulls. The probability of a federal funds rate cut in September jumped to 80%, and the chances of two acts of monetary expansion in 2024 jumped to 69%. As a result, the yield on U.S. Treasury bonds fell sharply, dragging the dollar with it.
Jerome Powell's comments and updated FOMC forecasts
At yesterday's press conference, Jerome Powell noted that the Fed has made some progress in combating inflation and called the May report a step in the right direction, but stressed the need to generate further confirmation signals. Despite this, the markets reacted quite violently to the updated FOMC rate forecast.
Four FOMC members do not expect monetary policy easing in 2024. Seven members supported one act of monetary expansion, and eight supported two. In the spring, it was about two and five members, respectively. Previously, ten members of the Committee had seen at least three cuts in the federal funds rate. Now their views have changed, which allowed the EURUSD bears to partially recover from the blows inflicted by the inflation statistics for May.
Market expectations and the Fed's caution
Although the chances of a rate cut in September fell to 62%, derivatives still point to a 62% probability of two acts of monetary expansion in 2024. Investors believe that the Fed's estimates are too conservative and that the Fed may be overly cautious.
Unlike other world central banks, which have already lowered rates or expressed confidence in achieving inflation goals, the Fed is in no hurry to ease monetary policy. This is due to strong US GDP growth, which is holding back the Fed's change of course. The US financial system is less dependent on bank lending than in the past, and many homeowners are protected from aggressive monetary restriction in 2022-2023 due to fixed mortgage rates.
Historical lessons and current strategy
Nevertheless, the Fed must be prudent and careful to avoid the mistakes of the 70s of the last century, when the premature declaration of victory over inflation led to a double recession. This caution helped to avoid a catastrophic fall in the dollar. After the slowdown in CPI growth and the FOMC forecast for one rate cut, our forex trading strategy presupposes the sale of EURUSD on strengthening. Those who took advantage of this advice were able to open short positions in the area of 1.0835-1.085. We continue to hold the shorts.
EUR/USD Technical analysis
After the Fed's two-day interest rate meeting, the US dollar weakened against most world currencies. This allowed EUR/USD to strengthen towards the resistance area (B) 1.0858 - 1.0845.But here the pair met resistance from sellers and failed to break above the key level.. This suggests that today the downward short-term trend remains in force. We will consider selling the pair on an upward correction with the nearest target at 1.0788. The second target will be at least on June 11.
To change the trend and switch to buying EUR/USD, it is necessary to break through the 1.0858 level and consolidate higher. In this case, the direction of the short-term trend will change to an upward one with a target in the area of 1.0996 - 1.0971.