- The EUR/USD rose further to touch the $1.088 resistance level at the end of trading last week, its highest level in two weeks, as the divergence between the ECB and Fed's monetary policy paths widened.
- Higher-than-expected inflation readings in the eurozone could force the ECB to make fewer rate cuts this year.
According to the results of the economic calendar, general and core inflation rates rose to 2.6% and 2.9% respectively in May, more than expected. A set of data pointed to an economic backdrop that could Favor a less restrictive monetary policy by the US Federal Reserve. Core personal consumption expenditures prices, the US Federal Reserve’s preferred measure of core inflation, rose by 0.2%, the slowest pace so far this year, raising hopes that inflation may be approaching its target.
In addition, personal spending and income grew at a slower pace, easing the previous perception of an overly resilient US economy.
According to stock trading platforms, European stock market indices ended a volatile session with mixed performance as investors analysed a set of economic data for insights into the policy outlook of major central banks. According to trading, the Stoxx 50 index fell by 0.1% to close at 4,977, while the Stoxx 600 index rose by 0.2% to close at 518. According to an official announcement, headline and core inflation rates rose more than expected in the euro zone, raising concerns that the trend of declining European inflation may not continue as inflation persists.
Overall, the ECB is still set to cut key interest rates when it meets this week, but stark differences between hawks and doves on the ECB's Governing Council have raised uncertainty about how many cuts the central bank may deliver beyond Q3. In contrast, weak US PCE growth has boosted bets that the Fed will ease policy this year, adding some relief to global stocks.
Furthermore, heavyweight tech stocks pushed the Stoxx 50 lower, with ASML, Prosus and SAP down between 1.1% and 2.3%. The Stoxx 50 rose 1.1% in May, while the Stoxx 600 rose 2.6%.
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According to licensed brokerage platforms, the European Central Bank could open the door to a weaker euro on Thursday as its first interest rate cut of the cycle puts the region on a different policy path from the US. With a quarter-point cut, officials will finally accept a widening of the spread between borrowing costs on both sides of the Atlantic, the implications of which they have debated for months.
In general, ECB policymakers, led by President Christine Lagarde, insist that they are comfortable charting a separate course from the Fed, even if it risks weakening the currency and potentially feeding into inflation. Moreover, the extent of officials' tolerance is likely to loom large in their discussions of further potential easing - even more so after recent reports pointed to continued consumer price pressures. In recent times, data released last Friday showed the core inflation gauge unexpectedly rising in May for the first time in a year.
The ECB can already see how diverging policy expectations have begun to affect global markets. As a result, the euro has fallen to its lowest level against the pound in nearly two years amid expectations that the Bank of England will lag the ECB in cutting rates.
EUR/USD Technical analysis and forecast:
According to the daily chart above, bulls are in control of the EUR/USD pair, lacking momentum and could gain further control if it moves towards the 1.0920 and 1.3000 psychological resistance levels, respectively. On the other hand, and in the same time frame, moving towards the support level of 1.0770 will be important for stronger control of the trend by the bears. Finaly, the performance may remain in narrow ranges until the reaction from the announcement of the ECB policies and the US employment numbers.
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