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EUR/USD Analysis: Anticipation of European Rate Cuts

By Mahmoud Abdallah
Mahmoud has been working fulltime in the Foreign Exchange markets for 12 years. Offers his analysis, articles and recommendations at the most renewed Arabic websites specialized in the global financial markets, and his experience gained a lot of interest among Arab traders. Works on providing technical analysis, market news, free signals and more with follow up for at least 12 hours a day, and aims to simplify forex trading and the concept of trading for his audience.
  • What is the euro against the dollar exchange rate forecast for this week?
  • We expect a test of 1.09 and a potential breakout from the May range, but US Labor market numbers must come in weak.
  • The impressive rally in EUR/USD on Friday reassured bulls looking for higher levels, but the advance was not enough to trigger a breakout from May's broader consolidation range.

EUR/USD Analysis Today 04/06: European Rate Cuts (graph)

According to licensed trading companies’ platforms, the euro rose against all its G10 peers after inflation in the eurozone exceeded expectations. The US dollar surrendered to a reading of personal consumption expenditures that was below consensus, which will be welcomed by those at the Federal Reserve who will be keen to cut interest rates before the end of the year.

The European Central Bank (ECB) is expected to cut interest rates this week, which will not be a surprise to move the market since it was announced months ago. What could move the market is guidance on future rate cuts. Commenting on the event, UBS economist Dominic Schneider said: “The main event is the ECB meeting, with interest rate cuts well expected, so guidance on future policy moves will be a key driver. We think the euro will weaken, especially given its strong rally in recent weeks.”

Overall, the eurozone economy is recovering, and inflation continues to prove stable, suggesting there is little need to rush into another cut as early as July. Instead, we expect the ECB to stress that it remains data-driven and argue that it is prudent to allow some time before cutting rates again. Moreover, this would be a case of status quo for the euro and could lead to further strength as eurozone bond yields rise relative to US yields, potentially sending the euro/dollar rate to 1.09.

Meanwhile, the analysts expect a cautious easing cycle and only two cuts in 2024. Also, the ECB will publish updated economic forecasts. From our perspective, there is a risk that the ECB could be less hawkish than expected, providing some modest support for EUR/USD.

Turning to the US dollar, according to the economic calendar results, Monday’s US PMI reading should generate some interest, although we would not give much weight to any market movements ahead of the all-important jobs report on Friday. Last month, US non-farm payrolls came in below 200k for the first time since Q4 2023. All eyes are on this month’s release to gauge whether this is just a one-off or whether new employment is cooling off. Obviously, This is crucial for the US.

The market is looking for a headline nonfarm payroll reading of 180,000 and an unemployment rate of 3.9%. Average hourly earnings are expected to rise by 3.9% year-on-year. Therefore, if US Labor market data is weak, markets may increase the probability of a first rate cut in July, which would further weaken the US dollar. For its part, the Fed is in no hurry to cut rates, leaving the market pricing in a full rate cut by December, with September being a 50/50 call.

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EUR/USD Technical analysis and forecast:

According to recent trading, the EUR/USD pair has built modest upward momentum, even if it remains stuck in a consolidation range. So far, it has been unable to decisively rise above the April high of 1.0885. Meanwhile, support around the 1.0785 – 1.0800 area continues to hold. Overall, a close above 1.0860 is constructive and paves the way for a potential test of the 1.09 level and from there to the psychological high of 1.10 in the coming days. This confirms the strength and control of the bulls over the trend.

At the same time, we note that the daily RSI for EUR/USD is at 60 and pointing up, while the exchange rate is also above its main moving averages. Technically, the underlying trend looks modestly bullish after breaking the downtrend line established since December. Consequently, bulls will remain confident as long as the key support level around 1.0800 holds. Ultimately, it may hold its gains until the markets and investors react to the ECB policy decisions and US jobs numbers.

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Mahmoud Abdallah
About Mahmoud Abdallah
Mahmoud has been working fulltime in the Foreign Exchange markets for 12 years. Offers his analysis, articles and recommendations at the most renewed Arabic websites specialized in the global financial markets, and his experience gained a lot of interest among Arab traders. Works on providing technical analysis, market news, free signals and more with follow up for at least 12 hours a day, and aims to simplify forex trading and the concept of trading for his audience.
 

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