- EUR/USD attempts to gain ground near 1.0700 as ECB Lane rules out hopes of subsequent rate cuts.
- Investors worry the French economy will face a financial crisis if the far right forms a new government.
- The US Dollar will dance to the tunes of the US Retail Sales data.
EUR/USD aims to gain ground near the crucial support of 1.0700 in Monday’s European session. The major currency pair finds cushion as European Central Bank (ECB) Chief Economist Philip Lane emphasizes maintaining interest rates at their current levels in coming months. Lane added that he wants to see disinflation in the service sector for more than a month as needed for easing policy further.
ECB policymakers have been reluctant to provide an interest rate-cut trajectory as they remain concerned over the stubborn wage growth outlook, which could revamp price pressures again. On Sunday, ECB Governing Council member and Governor of the Bank of Latvia Martins Kazaks said that the bank must not allow inflation to remain above 2% into 2026. Kazaks added, “Currently, I think we are still on the path to 2% in the second half of 2025, and I really hope that we will do it by that time.”
Earlier, the shared currency pair remained under pressure as potential risks of the financial crisis in France amid firm speculation that Marine Le Pen’s far-right National Rally (RN) will form a new government, which will have an adverse impact on the nation’s fiscal situation, that has dampened Euro’s appeal.
French Finance Minister Bruno Le Maire said on Friday that the euro zone’s second-biggest economy was at risk of a financial crisis if either the far right or left won because of their heavy spending plans, Reuters reported.On the monetary policy front,
Daily digest market movers: EUR/USD finds supoort while the near-term outlook is uncertain
- EUR/USD finds temporary support around 1.0700 after rebounding from 1.0660 as the US Dollar (USD) struggles to extend upside above a six-week high of 105.80. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects modestly to near 105.50.
- The USD Index grinds between market speculation for two rate cuts by the Federal Reserve (Fed) this year due to resumed progress in the disinflation process and the Fed’s projection for only one rate cut amid fears of reacceleration in price pressures.
- According to the CME FedWatch tool, 30-day Federal Fund Futures pricing data has firm expectations to begin reducing interest rates from the September meeting and following suit again in the November or December meeting.
- After the Fed’s blackout period, policymakers advocate for only one rate cut this year, as they updated in the latest interest rate projections. On Friday, Chicago Fed Bank President Austan Goolsbee said that he was relieved after consumer and producer inflation data for May showed that price pressures were softer than expected. However, he wants to see similar data for months before lowering interest rates.
- Going forward, investors will pay close attention to the United States (US) monthly Retail Sales data for May, which will be published on Tuesday. The Retail Sales data, a close measure of consumer spending, is estimated to have increased by 0.3% after remaining flat in April.
Technical Analysis: EUR/USD remains below 200-day EMA
EUR/USD hovers around 1.0700 after returning into the Symmetrical Triangle formation on a daily timeframe. The major currency pair is expected to find support at 1.0636, near the upward-sloping trendline of the chart pattern plotted from the low from October 3, 2023, at 1.0448, and the horizontal cushion plotted from the April 16 low around 1.0600.
On the upside, the downward-sloping border from the high of December 28, 2023, at 1.1140 will be a major barrier for the Euro bulls near 1.0750.
The long-term outlook of the shared currency pair has also turned negative as prices dropped below the 200-day Exponential Moving Average (EMA), which trades around 1.0800.
The 14-period Relative Strength Index (RSI) falls below 40.00. Momentum could turn bearish if the RSI sustains below this level.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Source: EUR/USD grinds between Fed’s hawkish remarks and ECB’s pause to rate cuts
