Political Risks Weigh on Euro

The European Central Bank (ECB) reduced interest rates last Thursday for the first time in five years, cutting the benchmark deposit rate by 0.25 percentage points to 3.75%. This move, anticipated by policymakers, aims to address declining inflation in the euro area, although the future of borrowing costs remains uncertain due to fluctuating inflation rates.

The International Monetary Fund deemed the ECB's rate cut "appropriate" but advised maintaining a data-dependent approach. ECB President Christine Lagarde emphasized that future rate cuts won't follow a linear path and might not occur at every meeting. The ECB intends to keep rates restrictive until inflation consistently drops to its 2% medium-term target, adopting a meeting-by-meeting strategy.

Recent comments from ECB officials indicate a cautious outlook, with Lagarde and Chief Economist Philip Lane suggesting that significant changes in economic data are needed for further rate adjustments. Despite a rebound in economic growth among the 20 euro-using countries, growth is expected to remain modest until 2025.

The ECB's latest economic projections indicate that inflation will likely remain above 2% well into next year due to high wage growth. The bank revised its inflation forecast to 2.2% for next year and expects inflation to fall below the target to 1.9% by 2026, signaling a challenging path ahead to meet its inflation goals.

Bank of America Securities reports a resurgence of bearish sentiment towards the euro following the European Parliament elections and rising political risks. The European Parliament elections, concluding over the weekend, saw significant rightward shifts in various countries, notably in France.

Top concerns for voters in the EU election included the economy, migration, and international conflicts. Despite this, investor morale in the euro zone increased for the eighth month in June, although economic recovery remains challenging.

Germany, the euro zone's largest economy, warned of sustained wage growth, leading to persistent inflation, particularly in services. This complicates the ECB's efforts to reduce interest rates swiftly.

Meanwhile, German industrial orders fell for the fourth consecutive month in April, while exports rose for the second month in a row.

Germany's economic struggles, including high energy costs and weak global orders, marked it as the weakest among major euro zone economies last year. However, German Economy Minister Robert Habeck expressed optimism for up to 1.5% growth in 2025.

Economists anticipate two more ECB rate cuts this year, likely in September and December, with markets pricing in 35 basis points of easing by year-end, a significant shift from earlier expectations of over five cuts.

The dollar reached a four-week high on Tuesday, driven by anticipation of an upcoming U.S. inflation report that may influence the timing of the Federal Reserve's first rate cut. On Wednesday, the dollar steadied as markets awaited key inflation data and the Fed's updated interest rate projections.

In May, U.S. small-business confidence and hiring plans hit their highest levels of the year, although uncertainty about the upcoming presidential election reached a near four-year high. Consequently, traders have adjusted their expectations, now seeing roughly 50-50 odds for a September rate cut.

Investors are particularly focused on the Fed's economic projections, including GDP, unemployment, core PCE, and interest rates, through 2026. The U.S. Labor Department is set to release the May consumer price index (CPI) on Wednesday, just before the Fed's policy meeting concludes. According to the Fed Interest Rate Monitor, most investors (95.1%) expect rates to remain unchanged.

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

Resistance : 1.0765, 1.0778, 1.0800

Support : 1.0723, 1.0710, 1.0688

1D Outlook  

Source: TradingView

Buy/Long 1 If the support at the price range 1.0693 - 1.0723 is touched, but the support at 1.0723 cannot be broken, the TP may be set around 1.0769 and the SL around 1.0678, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0765 - 1.0795, TP may be set around 1.0825 and SL around 1.0708, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0765 - 1.0795 is touched, but the resistance at 1.0765 cannot be broken, the TP may be set around 1.0713 and the SL around 1.0810, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0693 - 1.0723, TP may be set around 1.0658 and SL around 1.0780, or up to the risk appetite.       

Pivot Points Jun 12, 2024 03:26AM GMT

Sources: Investing 1, Investing 2