A deposit rate cut from 4% to 3.75% has not made the EURUSD collapse because the markets expected that move. The odds of further monetary easing by the ECB and the Fed are almost equal. How does it affect the pair? Let’s discuss it and make a trading plan.
Weekly fundamental forecast for euro
Everybody is happy. The ECB likes how April’s signal about upcoming policy easing influenced the euro area’s economy. The EURUSD bulls appreciate that the European Central Bank cut the deposit rate from 4% to 3.75% for the first time in almost years. Christine Lagarde noted that further monetary easing is likely but will be data-dependent. The main currency pair tried to take a level of 1.09 by storm.
Even though the ECB joined G10 central banks cutting rates, euro fans had plenty of reasons to be optimistic. Forecasts for core inflation were revised from 2.3% to 2.5% in 2024 and from 2% to 2.2% in 2025, and the regulator noted that the indicator would most likely be above the target next year.
ECB forecasts for core inflation
Source: Wall Street Journal.
Christine Lagarde said that monetary policy remains restrictive despite rate cuts. Governor of the Austrian National Bank Robert Holzmann refused to support the majority decision, pointing to dependence on data. Moreover, Bloomberg’s insider claims that the Governing Council has ruled out a second policy easing step in July, while some of its members wonder if it will be appropriate in September. As a result, German bond yields have grown, and the spread between US and German bond yields has narrowed, creating a tailwind for the EURUSD.
US/Germany bond yield trends
Source: Wall Street Journal.
The derivatives market revised expectations of the ECB’s monetary easing in September from 80% to 70%. The deposit rate is expected to be cut by 36 bps in 2024, suggesting that the chance of another act of monetary expansion before the end of the year is less than 50%. The same is forecast for the Fed funds rate. We can’t refer to different monetary policy paces in Frankfurt and Washington anymore. As a result, the risks of the EURUSD retreating to the April bottom of 1.06 have significantly decreased.
Whether the main currency pair will rise higher depends on the May US labor market statistics. Bloomberg experts predict an increase in non-farm employment by 185 thousand, unemployment at 3.9%, and a rise in wages by 3.9%. Real data close to the consensus estimate will unlikely change the chances of the Fed’s policy easing and impact the EURUSD. The derivatives expect a federal funds rate cut in September, with a 68% probability for now.
Weekly trading plan for EURUSD
The main currency pair’s reaction to May non-farm payrolls will likely be moderate, and even more so as US inflation data are scheduled for release Wednesday, 12 June. However, if US employment disappoints, bond yields will fall, and the EURUSD will continue rising to 1.108. The strategy of buying the pair remains valid.
Price chart of EURUSD in real time mode
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