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The ECB and speculators actively buying the EURUSD understand that the ECB’s earlier monetary expansion will not weaken the euro. Let’s discuss this and make a trading plan.
Weekly fundamental forecast for euro
The EURUSD bears sincerely hoped that the ECB’s earlier start of policy easing compared to the US and its large scale would calm their opponents. However, Philip Lane dotted all the i’s. The ECB’s key economist believes inflation in the eurozone could accelerate only amid a significant weakening of the euro, which will not happen as the divergence in the economic growth of the United States and the eurozone is narrowing. Checkmate for US dollar fans who believe central banks know more than the markets.
In the week ended 21 May, hedge funds and asset managers turned their backs on the greenback amid slowing inflation and disappointing retail sales. Their combined net long position of $2.02 billion in the US dollar against major currencies transformed into net shorts of $5.36 billion, which will only increase as Date X approaches – the first federal funds rate cut in the cycle, Commonwealth Bank of Australia believes.
Speculative positioning in USD
Source: Bloomberg.
Interestingly, most of the money flows into the pound and the euro – procyclical currencies that will benefit from the synchronization of global GDP growth and the offset factor of American exceptionalism.
Dynamics of speculative positions in major currencies
Source: Bloomberg.
For the market, Philip Lane’s words were much more important than the slowdown in the German business climate index from the IFO, which indicates that a strong recovery will not automatically follow a cyclical bottom of the German economy. They were also more important than the dovish rhetoric of Bank of France President François Villeroy de Galhau, who doesn’t exclude the chance of a second deposit rate cut in July following June.
The ECB’s chief economist told the truth. He noted that the slowdown in the eurozone’s economy was due to the negative impact of the war in Ukraine and the associated energy crisis, which the United States did not feel the hard way. Philip Lane believes the rapid decline of the eurozone’s inflation towards the 2% target indicates the European Central Bank’s effective work. So, is the Fed less effective? Bad news for the EURUSD bears.
The ECB’s further steps after the June rate cut will be data-dependent. The chief economist says that monetary policy easing will be slower if inflation accelerates. This statement looks like a call for EURUSD bulls to attack in the context of the Bloomberg-expected increase in consumer price growth in the eurozone in May.
European inflation trends
Source: Bloomberg.
Weekly trading plan for EURUSD
Not long ago, the derivatives market was sure about three acts of monetary expansion by the ECB in 2024, now – only about two. The divergence in monetary policy with the Fed is not so big as to stop the EURUSD rally. Hold the longs opened at 1.073 and 1.083 and occasionally build them up. The target of 1.108 remains valid.
Price chart of EURUSD in real time mode
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