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If the European Central Bank had waited for the Fed’s verdicts, the euro could have been saved. However, Christine Lagarde and her colleagues intend to start first, weakening the EURUSD. Let us discuss the Forex outlook and make up a trading plan.
Monthly Euro fundamental forecast
The ECB official, Olli Rehn declared that “the ECB is not the Fed’s ’13th Federal District.’” This statement most accurately reflects what is happening. At its April meeting, the European Central Bank decided to keep the deposit rate at 4% but hinted at its cut in June. Frankfurt can afford to start earlier than Washington. The ECB doesn’t have to look at the Fed. The ECB independence weakens the EURUSD.
Christine Lagarde noted that several ECB officials voted for cutting the rates but agreed with the majority that it would be better to start monetary easing in June. Coupled with the statement that the ECB’s satisfaction with the progress in the inflation trend will allow for easing monetary policy, this makes the June cut in borrowing costs compulsory. CME derivatives put the odds of an early summer federal funds rate cutt at 24%. That is, Frankfurt will start first.
Despite the fact that the ECB is independent of the Federal Reserve, the USA is the largest economy in the world, and news from the United States cannot but impact the euro area. According to ING estimates, the consequences of accelerating US inflation will be felt in Europe in approximately six months. It is not surprising that the derivatives market has reduced the expected scale of monetary expansion not only by the Fed but also by the European Central Bank.
Dynamics of market expectations for Fed and ECB interest rates
Source: Wall Street Journal.
The EURUSD could have dropped deeper if consumer and producer prices had accelerated. However, PPI increased by 0.2% M-o-M, falling short of forecasts, which the core indicator corresponded to. Moreover, calculations of the personal consumption expenditure index based on the CPI show its growth in March by 0.2%. The PCE is the Fed’s preferred measure of inflation.
For EURUSD, this could mean a correction but not a downtrend reversal. According to Boston Fed President Susan Collins, the urgency to cut rates is now lower than at the beginning of the year. She revised her March forecast and believes the Fed needs to take one less act of monetary easing in 2024. New York Fed president John Williams claims that there is no need to rush the cut the rates.
Different start dates and the speed of rate cuts contribute to the widening of the yield spread between US and German bonds, suggesting the capital flow from Europe to North America, and the EURUSD drop toward 1.055.
Dynamics of EURUSD and yield spread
Source: Bloomberg.
Monthly EURUSD trading plan
Of course, the Euro could still recover. US corporate reporting season kicks off next week, which could support the S&P 500, improve risk appetite, and put pressure on the greenback as a safe-haven asset. Most likely, the IMF will raise its forecast for global economic growth, which will support pro-cyclical currencies, including the euro. However, I suggest selling the EURUSD with targets at 1.06 and 1.05 on the correction.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
