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EUR/USD nears 1.0900 on prospect of Fed rate cut

  • EUR/USD remains firm near 1.0900 due to multiple tailwinds.
  • ECB board member Isabel Schnabel said she remains doubtful the central bank will extend rate cuts beyond June.
  • Fed officials insist on keeping interest rates higher for longer.

EUR/USD declines slightly but holds on to gains near 1.0900 in the American session on Monday. EUR/USD remains in bullish territory due to investors' increased risk appetite. The Euro has performed strongly in recent sessions as market participants remain slightly cautious about whether the European Central Bank (ECB) will extend its monetary policy tightening beyond the June meeting.

The ECB is expected to begin reducing interest rates from its June meeting. However, ECB policymakers remain divided over a possible rate cut at the July meeting. Some of them worry that an aggressive cycle of rate cuts could reignite price pressures and offset the impact on inflation.

Last week, ECB Council member Isabel Schnabel stated that, depending on the data incoming, a rate cut in June could be appropriate, but that the path forward after June is much more uncertain. Schnabel added that he cannot commit in advance to any specific rate path due to the high uncertainty.

In economic data, investors will focus on preliminary Eurozone and US Purchasing Managers' Index (PMI) data for May, due out on Thursday. PMI data will indicate your economic outlook.

Daily summary of market movements: EUR/USD remains sideways awaiting preliminary Eurozone/US PMI.

  • The EUR/USD pair is trading in a tight range below the 1.0900 round resistance. The EUR/USD pair is expected to remain quiet as investors focus on the Federal Open Market Committee (FOMC) minutes of the May meeting, which will be released on Wednesday. The FOMC minutes will provide a detailed explanation of why interest rates remain stable and policymakers' views on the outlook for interest rates.
  • Fed policymakers' communication on the outlook for interest rates is expected to have remained hawkish as inflationary pressures in the first three months of this year accelerated. However, April Consumer Price Index (CPI) data fell as expected due to lower prices for piped gas utilities and used cars and trucks. Fed policymakers are expected to have avoided supporting further tightening of monetary policy.
  • Although easing price pressures have provided some relief that progress on disinflation has not stalled, Fed policymakers continue to lean toward a tightening policy stance for a longer period to build confidence. when inflation will sustainably return to the desired rate of 2%.
  • Last week, New York Fed President John Williams declared that monetary policy is restrictive and in a good place. He sees no economic indicators that suggest the need to change the direction of monetary policy now. Asked about the inflation outlook, Williams said: “In the very short term, I don't expect to get that increased confidence that we need to see in inflation progressing towards the 2% target,” Reuters reported.

Technical Analysis: EUR/USD Maintains Triangle Breakout-Induced Gains

EUR/USD maintains the breakout of the symmetrical triangle chart pattern seen on a daily time frame. The stabilization of the major currency pair above the breakout region suggests that the pair is quite bullish. Furthermore, the bullish crossover of the 20-day and 50-day EMA around 1.0780 has improved the short-term outlook for the pair.

The 14-period RSI has moved comfortably towards the bullish range of 60.00-80.00, suggesting that momentum has tilted to the upside.

Frequently asked questions about the Fed

What does the Federal Reserve do and how does it affect the dollar?

The monetary policy of the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability and promoting full employment. Your main tool to achieve these objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the Federal Reserve's 2% target, it raises interest rates, raising borrowing costs throughout the economy. This translates into a strengthening of the US Dollar (USD), as it makes the United States a more attractive place for international investors to place their money.
When inflation falls below 2% or the unemployment rate is too high, the Federal Reserve can lower interest rates to encourage borrowing, which weighs on the greenback.

How often does the Federal Reserve hold monetary policy meetings?

The Federal Reserve (Fed) holds eight meetings a year, in which the Federal Open Market Committee (FOMC) evaluates the economic situation and makes monetary policy decisions.
The FOMC is made up of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven presidents of the regional Reserve banks, who serve for one year on a rotating basis.

What is Quantitative Easing (QE) and how does it affect the USD?

In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed's weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.

What is Quantitative Tightening (QT) and how does it affect the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the capital of the maturing bonds it has in its portfolio to buy new bonds. It is usually positive for the value of the US Dollar.

Source: Fx Street

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