ECB Expected to Cut Rates Next Week as Eurozone Inflation Expectations Drop

The European Central Bank (ECB) is expected to implement a rate cut next week, as confirmed by ECB member Francois Villeroy de Galhau. This move aligns with market expectations, although investors have recently adjusted their forecasts, predicting fewer rate cuts in 2024 and early 2025.

An ECB survey revealed that euro zone consumers' inflation expectations have slightly decreased, hitting the lowest levels since September 2021. Expectations for inflation over the next 12 months dropped to 2.9%, and for the next three years to 2.4%, still above the ECB’s 2% target. Income expectations remained steady, and consumers were less pessimistic about economic growth and unemployment, suggesting a stable labor market. Although the ECB had anticipated a rate cut next month, rising negotiated wage growth across the eurozone has complicated the outlook.

On the other hand, the IMF recommended that Germany consider relaxing its debt brake to allow for increased public spending. The IMF suggested that a 1% GDP relaxation could enable essential investments without increasing the debt-to-GDP ratio.

The IMF's April outlook cut Germany's GDP growth forecast to 0.2% for 2024 and 1.3% for 2025, anticipating a slow recovery led by consumption as inflation eases. Growth is expected to strengthen in 2025, supported by private investment and moderate monetary policy. However, aging demographics will likely slow growth to about 0.7% annually in the medium term.

In May, German business morale stagnated, indicating a slow economic recovery. Private sector activity rose for the second consecutive month, driven by services, despite manufacturing weaknesses. German producer prices dropped more than expected in April, mainly due to lower energy costs. Despite a forecast of economic stagnation for 2024, private consumption is expected to grow by 1% as inflation falls to 2.3%. Housing prices are predicted to decline by 2% this year due to falling borrowing costs and limited affordable housing supply.

In France, the private sector contracted in May after growth in April, with both services and manufacturing experiencing a downturn. The French economy is projected to grow slightly in the second quarter, following a 0.2% increase in the first quarter.

Markets currently expect around 60 basis points in cuts, bringing the ECB's benchmark rate to approximately 3.4% by December. German two-year bond yields, sensitive to interest rate expectations, are at their highest in six months, above 3%, reflecting a nearly 70% increase this year.

On Tuesday, the dollar rebounded as U.S. Treasury yields reached a four-week high due to weak demand for two-year and five-year note auctions. This followed data indicating an unexpected improvement in U.S. consumer confidence in May after three months of decline. Strong first-quarter economic data and a resilient labor market have delayed a bearish outlook on the dollar.

Although consumer price inflation in April was lower than expected, boosting hopes for potential rate cuts, Fed officials emphasized the need for several more months of improvement before easing policy. Additionally, more consumers now believe a recession could occur within the next year, although they remain optimistic about the stock market and plan to buy major household appliances.

This week’s primary economic focus will be on the personal consumption expenditures report, the Fed’s preferred inflation measure, due on Friday. Therefore, the euro is likely to stay under pressure during this period due to anticipated interest rate cuts by the ECB occurring sooner than those by the US.

Data for Technical Analysis (1H) CFD EUR/USD

Resistance : 1.0852, 1.0854, 1.0857

Support : 1.0846, 1.0844, 1.0841

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.0841 - 1.0846 is touched, but the support at 1.0846 cannot be broken, the TP may be set around 1.0852 and the SL around 1.0839, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0852 - 1.0857, TP may be set around 1.0865 and SL around 1.0843, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0852 - 1.0857 is touched, but the resistance at 1.0852 cannot be broken, the TP may be set around 1.0844 and the SL around 1.0859, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0841 - 1.0846, TP may be set around 1.0830 and SL around 1.0855, or up to the risk appetite.       

Pivot Points May 29, 2024 03:01AM GMT