- EUR/USD sharply retreated to the 1.0700 region post-US CPI.
- ECB’s P. Lane said interest rate cuts depend on data.
- ZEW’s Economic Sentiment improves in Germany and the euro bloc.
The acute rebound in the US dollar (USD) led to a meaningful broad-based pullback in risk-oriented assets on Tuesday, causing EUR/USD to retreat to the 1.0700 region and clock a new yearly low.
The renewed interest in buying the Greenback coincided with the equally strong increase in US yields across various timeframes, as investors now see the possibility of the Federal Reserve (Fed) embarking on a cycle of monetary easing, potentially starting in June. On this, the probability of a rate reduction at the May gathering dropped substantially after US inflation figures rose less than forecasts during the first month of the year, prompting market participants to reprice a potential move on rates for later than previously envisaged.
Back to rate cuts, CME Group’s FedWatch Tool sees the probability of a rate cut by the Fed in May at 37%, while that move is predicted at nearly 51% at the June 12 event.
On the domestic front, auspicious prints from the ZEW institute saw the Economic Sentiment improve further in Germany and the euro area in February. On this, ZEW officials reported that respondents’ evaluation of the current economic situation has declined to its lowest point since June 2020, indicating a concerning state for the German economy. Over two-thirds of respondents anticipate the European Central Bank (ECB) to lower interest rates within the next six months due to declining inflation rates. Additionally, nearly three-quarters of respondents foresee imminent interest rate cuts from the US central bank.
From the ECB’s backyard, Board member P. Lane expressed optimism about the bank’s progress in reducing inflation and believed that the price trend was favourable. He added that the next step is to consider a rate cut, but the timing will be based on data analysis. However, Lane suggested that it is important to exercise caution and avoid implementing rate cuts either too soon or too late, as they carry risks. Furthermore, the extent of the interest rate cuts will depend on the progress towards the desired price goal.
EUR/USD daily chart
EUR/USD short-term technical outlook
If the EUR/USD breaks the 2024 low of 1.0700 (February 12), it may then aim for the November 2023 bottom of 1.0516 (November 1), followed by the weekly low of 1.0495 (October 13, 2023). This will be followed by the 2023 low of 1.0448 (October 3) and the round level of 1.0400.
Meanwhile, the pair’s outlook is expected to continue negative as long as it trades below the 200-day SMA of 1.0829.
On the positive side, spot must break above the weekly high of 1.0932 (January 24) to reach the next weekly top of 1.0998 (January 11), which strengthens the psychological barrier at 1.1000. Further north of this site is the December 2023 peak of 1.1139 (December 28).
The outlook on the four-hour chart now appears somewhat deteriorated. Bullish advances may aim for 1.0805 before pushing on to the 100-day moving average at 1.0816, prior to the 200-SMA od 1.0884 and 1.0897. On the other hand, a break below 1.0700 suggests an initial drop to 1.0656. The MACD flirts with the positive zone, and the RSI hovers around the 32 region.