FOREX Fundamental analysis for EUR/USD
No matter how much EUR/USD buyers would like to reverse the downward trend, the laws of economics are strictly followed. In light of weakened consumer activity and GDP, inflation in the Eurozone is actively declining, while in the United States the process is slowing down.
This justifies market expectations about a more active start to the ECB's monetary expansion cycle compared to the Fed, as well as the scale of rate cuts. The rise in the exchange rate of the main currency pair is just a temporary correction, which does not imply a change in forex trading strategies.
The forecasts of the European Central Bank suggest that consumer prices will return to the 2% target by 2025, however, according to. According to Bloomberg analysts, in the summer the indicator may fall below this level, and by the beginning of next year it will fall to 1.4% altogether. The ECB knows well how difficult it is to fight deflation. Perhaps it makes sense not to bring the situation to this and consider the possibility of loosening monetary policy sooner than markets expect.
According to the minutes of the March meeting of the ECB Governing Council, wage growth is slowing down, and companies are increasingly absorbing high costs, preventing prices from rising. Inflation is steadily moving towards 2%, which justifies the talk of lowering rates. The futures market expects the ECB to reduce the cost of borrowing by 90 basis points, while the Fed will reduce them by only 70 bps in 2024, which creates conditions for the restoration of the "bearish" EURUSD trend.
Perhaps the start of the Fed's monetary expansion will not happen until June. Minneapolis Fed President Neil Kashkari had previously predicted two rate cuts in 2024. However, if inflation continues to rise, the question will arise as to whether the Central Bank should have eased monetary policy at all. His colleague from the Richmond Fed, Thomas Barkin, believes that it is wiser to wait to avoid the likely return of high inflation. Patrick Harker of the Philadelphia Fed emphasizes that inflation is still too high and the economy is overheated.
The "hawkish" rhetoric of FOMC members has become a cold shower for EURUSD buyers. The three-day rally of the main currency pair ended quickly. However, the Fed's opinion may currently change under the influence of new data. Statistics on American employment can be a key factor in decision-making by Jerome Powell's team.
If the US labor market remains positive, it will increase the likelihood that the federal funds rate will fall no more than twice in 2024, and expectations for the start of the monetary expansion cycle may shift from June to July. This means that the EURUSD will continue to fall. On the contrary, a serious deterioration in statistics may be the first signal of a cooling economy and lead to a more aggressive easing of the Fed's monetary policy, which will lead to a sell-off of the US dollar in forex currency trading. While the euro is trading below $1.0845, we keep the focus on sales.
EUR/USD Technical analysis
Yesterday, EUR/USD tested the boundary of the short-term downward trend of 1.0863 - 1.0850. Sellers were able to hold the zone and did not let buyers go higher. We will consider selling the pair in the direction of the minimum from April 2.
If yesterday's high is updated on Friday at the news release and EUR/USD is fixed higher, then the trend direction will change to an upward one. In this scenario, starting from Monday, we will look for entry points to purchases with a target at the upper limit of the channel 1.1001 - 1.0976.