EUR/USD: Dovish signals from the ECB and rising PPI
April 12, 2024 1:23 pm
The euro-dollar pair has today conquered the sixth figure. Sellers of EUR/USD have updated a four-month price low, and it seems they are not going to stop there. If the bears establish themselves below the support level of 1.0680 (the lower line of the Bollinger Bands indicator on the weekly chart), then the next target of the downward movement in the long term will be 1.0510. This price point corresponds to the lower boundary of the Kumo cloud on the W1 timeframe. This—let’s say—is the main, most ambitious target. Intermediate target levels are 1.0650 and 1.0600.
There are two main reasons for the decline in EUR/USD. These are the acceleration of inflation in the USA and the rise in dovish expectations regarding further actions of the ECB. All other reasons are derivative in nature.
Let’s start with the ECB. The European Central Bank has not become an ally of the euro. Following the April meeting, the regulator kept all monetary policy parameters unchanged, but at the same time voiced quite soft formulations indicating that the ECB is ready to start lowering interest rates at the next meeting.
In the accompanying statement, the regulator noted that wage growth is gradually slowing down, and most indicators of core inflation are decreasing. Past rate hikes and restrictive financial conditions continue to restrain demand, “contributing to a slowdown in the pace of consumer price growth.”
As for the prospects for easing policy, the Central Bank did not “directly” announce the date of the first rate cut in the accompanying statement. However, ECB President Christine Lagarde did mention the June meeting, in this context, during the final press conference. According to her, the overwhelming majority of the Governing Council members preferred to wait until June before deciding on rate cuts, although “some of them are already confident in the inflation trajectory.” In other words, some members of the regulator were ready to start easing monetary policy already at the April meeting.
In other words, the European Central Bank has signaled that it will start lowering interest rates at the June meeting. By and large, relevant signals from ECB representatives were heard earlier, but yesterday, the regulator consolidated this position.
As for the Fed, it seems that it will refrain from lowering rates in early summer. Although not so long ago (in March), this probability was estimated by the market at almost 70%. As of today, the probability of a rate cut at the June meeting is less than 20%, according to data from the CME FedWatch Tool.
The market revised its expectations after the publication of data on inflation growth in the USA in March. Not only the Consumer Price Index showed an upward trend, but also the Producer Price Index. Recall that the overall CPI accelerated to 3.5% last month, with a forecast of growth to 3.4%. This is the strongest pace of growth since September of last year (that is, a semi-annual high). In monthly terms, the overall index remained at the previous month’s level (0.4%), while most experts predicted its decline to 0.2%.
The core CPI, excluding volatile food and energy prices, also entered the green zone. Most experts were confident that it would decrease again (to 3.7%) year-on-year, that is, reach a low since April 2021. But instead, the indicator remained at the February level (3.8%).
Yesterday, another inflation indicator took over—the Producer Price Index. In annual terms, the overall PPI also accelerated—to 2.1% (in February it was at 1.6%). This is the strongest pace of growth since September of last year. After a decline at the end of last year, this indicator gradually, but consistently has been rising since December 2023. The core Producer Price Index also demonstrates an upward trend for the third month in a row: with a forecast of growth to 2.3%, it rose in March to 2.4% year-on-year.
The rise in inflation forced experts to revise their forecasts for the timing of the Fed’s interest rate cuts. September is often mentioned in updated forecasts, but there are more distant dates. For example, the currency strategists of Deutsche Bank are now confident that the American regulator will start easing policy only in December. That is, within the framework of 2024, only one rate cut of 25 basis points is expected. And in the next year, the bank’s experts expect two rounds of cuts, but only in the second half of 2025. Among the main reasons are the rise in inflation, strong labor market data (here it is worth recalling the March Nonfarm Payrolls), and the easing of financial conditions.
RBC Royal Bank experts have also revised their forecasts (also for December).
And Bank of America even admitted the possibility that the Fed will start easing policy only next year. And although their “base” scenario assumes a rate cut in December, BOA analysts warned their clients that even a December rate cut is “not a done deal.”
Thus, the presumed decoupling of ECB and Fed rates is putting pressure on the EUR/USD pair. At the moment, the pair has broken through the support level of 1.0680 and continues to fall. There are no reasons for a trend reversal at the moment. Therefore, it is advisable to use corrective pullbacks to open short positions. The targets of the downward movement are the levels of 1.0650 and 1.0600.
The material has been provided by InstaForex Company – www.instaforex.com
The euro-dollar pair has today conquered the sixth figure. Sellers of EUR/USD have updated a four-month price low, and it seems they are not going to stop there. If the bears establish themselves below the support level of 1.0680 (the lower line of the Bollinger Bands indicator on the weekly chart), then the next target of the downward movement in the long term will be 1.0510. This price point corresponds to the lower boundary of the Kumo cloud on the W1 timeframe. This—let’s say—is the main, most ambitious target. Intermediate target levels are 1.0650 and 1.0600.
There are two main reasons for the decline in EUR/USD. These are the acceleration of inflation in the USA and the rise in dovish expectations regarding further actions of the ECB. All other reasons are derivative in nature.
Let’s start with the ECB. The European Central Bank has not become an ally of the euro. Following the April meeting, the regulator kept all monetary policy parameters unchanged, but at the same time voiced quite soft formulations indicating that the ECB is ready to start lowering interest rates at the next meeting.
In the accompanying statement, the regulator noted that wage growth is gradually slowing down, and most indicators of core inflation are decreasing. Past rate hikes and restrictive financial conditions continue to restrain demand, “contributing to a slowdown in the pace of consumer price growth.”
As for the prospects for easing policy, the Central Bank did not “directly” announce the date of the first rate cut in the accompanying statement. However, ECB President Christine Lagarde did mention the June meeting, in this context, during the final press conference. According to her, the overwhelming majority of the Governing Council members preferred to wait until June before deciding on rate cuts, although “some of them are already confident in the inflation trajectory.” In other words, some members of the regulator were ready to start easing monetary policy already at the April meeting.
In other words, the European Central Bank has signaled that it will start lowering interest rates at the June meeting. By and large, relevant signals from ECB representatives were heard earlier, but yesterday, the regulator consolidated this position.
As for the Fed, it seems that it will refrain from lowering rates in early summer. Although not so long ago (in March), this probability was estimated by the market at almost 70%. As of today, the probability of a rate cut at the June meeting is less than 20%, according to data from the CME FedWatch Tool.
The market revised its expectations after the publication of data on inflation growth in the USA in March. Not only the Consumer Price Index showed an upward trend, but also the Producer Price Index. Recall that the overall CPI accelerated to 3.5% last month, with a forecast of growth to 3.4%. This is the strongest pace of growth since September of last year (that is, a semi-annual high). In monthly terms, the overall index remained at the previous month’s level (0.4%), while most experts predicted its decline to 0.2%.
The core CPI, excluding volatile food and energy prices, also entered the green zone. Most experts were confident that it would decrease again (to 3.7%) year-on-year, that is, reach a low since April 2021. But instead, the indicator remained at the February level (3.8%).
Yesterday, another inflation indicator took over—the Producer Price Index. In annual terms, the overall PPI also accelerated—to 2.1% (in February it was at 1.6%). This is the strongest pace of growth since September of last year. After a decline at the end of last year, this indicator gradually, but consistently has been rising since December 2023. The core Producer Price Index also demonstrates an upward trend for the third month in a row: with a forecast of growth to 2.3%, it rose in March to 2.4% year-on-year.
The rise in inflation forced experts to revise their forecasts for the timing of the Fed’s interest rate cuts. September is often mentioned in updated forecasts, but there are more distant dates. For example, the currency strategists of Deutsche Bank are now confident that the American regulator will start easing policy only in December. That is, within the framework of 2024, only one rate cut of 25 basis points is expected. And in the next year, the bank’s experts expect two rounds of cuts, but only in the second half of 2025. Among the main reasons are the rise in inflation, strong labor market data (here it is worth recalling the March Nonfarm Payrolls), and the easing of financial conditions.
RBC Royal Bank experts have also revised their forecasts (also for December).
And Bank of America even admitted the possibility that the Fed will start easing policy only next year. And although their “base” scenario assumes a rate cut in December, BOA analysts warned their clients that even a December rate cut is “not a done deal.”
Thus, the presumed decoupling of ECB and Fed rates is putting pressure on the EUR/USD pair. At the moment, the pair has broken through the support level of 1.0680 and continues to fall. There are no reasons for a trend reversal at the moment. Therefore, it is advisable to use corrective pullbacks to open short positions. The targets of the downward movement are the levels of 1.0650 and 1.0600.
The material has been provided by InstaForex Company – www.instaforex.com
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