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EUR/USD weakens on Bowman’s hawkish interest rate guidance

  • EUR/USD falls sharply from 1.0740 as Germany’s outlook appears bleak.
  • The ECB could make further rate cuts to improve the poor demand outlook.
  • The US Dollar will dance to the US PCE core inflation data for May.

EUR/USD faces intense selling pressure near 1.0740 in the American session on Tuesday. The pair’s pullback movement appears to have concluded as the US Dollar (USD) recovers after a modest correction.

The Dollar Index (DXY), which tracks the value of the greenback against six major currencies, bounces from 105.40 amid uncertainty over when the Federal Reserve (Fed) will begin easing interest rates. Uncertainty over Fed rate cuts deepens as S&P Global’s preliminary United States (US) Purchasing Managers’ Index (PMI) unexpectedly surpasses consensus and its previous figures in June. However, investors see the Fed cutting interest rates twice this year, starting at the September meeting.

As for the outlook for interest rates, Fed Governor Michelle Bowman said in an interview at Tuesday’s New York session that she doesn’t see any rate cuts this year. Bowman added that rate cuts at this time are inappropriate, and the option of further rate increases remains on the table if progress in the disinflation process appears to stall or reverse in the future.

This week, investors will focus on US core personal consumption expenditure (PCE) price index data for May, due out on Friday. Core PCE price index data is the Fed’s preferred measure of inflation and will provide new clues about when and by how much the central bank will cut interest rates this year.

Daily movements and market drivers: EUR/USD plummets amid uncertainty over the outcome of the Eurozone elections

  • EUR/USD faces strong resistance near 1.0740 as the outlook for the Euro is uncertain. The economic outlook for the Eurozone’s largest economy appears to be deteriorating. Data from Germany’s IFO Institute, which shows market sentiment on the current position of the economy and future prospects, indicated a gloomy outlook.
  • The IFO Business Climate, an early indicator of current business conditions and expectations in Germany, surprisingly fell to 88.6 in June. Investors forecast an increase to 89.7 from May’s reading of 89.3. In the same period, the Expectations index unexpectedly fell to 89.0 from estimates of 91.0 and the previous release of 90.3 (revised downward from 90.4). Commenting on the data release, IFO president Clemens Fuest said: “The German economy is struggling to overcome stagnation.”
  • Last week, HCOB’s preliminary PMI data for June also signaled a slowdown in economic activities due to a steeper decline in new orders from both the domestic and global markets. The manufacturing PMI contracted at a faster pace and fell to a six-month low of 45.6 from the previous reading of 47.3. The services PMI continues to expand, but at the slowest pace in three months.
  • The gloomy economic outlook for the Eurozone economy points to subsequent rate cuts by the European Central Bank (ECB). The ECB began dismantling its restrictive interest rate framework at its monetary policy meeting in early June. However, officials have refrained from committing to a specific path of rate cuts as they remain concerned about the upside risks to wage inflation, which could increase price pressures.
  • Meanwhile, political uncertainty deepens as France heads into the first round of early legislative elections, scheduled for June 30. French President Emmanuel Macron called early elections after his party suffered a defeat in the preliminary results of the European parliamentary elections held on June 9 against Marine Le Pen’s far-right National Rally (RN) party.

Technical Analysis: EUR/USD falls near 1.0700

EUR/USD faces pressure near Monday’s high around 1.0740. The major currency pair continues to face selling pressure near the descending edge of symmetrical triangle near 1.0750, which is traced from the December 28, 2023 high around 1.1140. The pair is trading below the 50-day EMA, indicating that the short-term outlook is bearish.

The 14-day RSI remains near 40.00. A bearish impulse would be triggered if the oscillator falls below this level.

economic indicator

CPI ex food and energy (YoY)

The CPI is published on US Labor Department and measures price movements through the comparison between retail prices of a representative basket of goods and services. The purchasing power of the dollar is diminished due to inflation. The CPI is a key indicator for measuring inflation and purchasing trends. Products whose prices have high volatility, such as energy and food, are excluded to capture a more accurate estimate of inflation. A reading above expectations is bullish for the dollar, while a reading below is bearish.

Read more.

Next post: Thu Jul 11, 2024 12:30

Frequency: Monthly


Previous: 3.4%

Fountain: US Bureau of Labor Statistics

Source: Fx Street

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