- The default risk in the United States was diminished as a pivotal decision of the Federal Reserve looms. The hawks won’t exit the game just yet, and if stability ensues, it might encapsulate the entirety of 2023. Accordingly, forward yield curves have relinquished the notion of a current year cut in interest rates.
- Significant deceleration signs of inflation are surfacing in Europe. The decline in oil and gas prices leads to further contraction in headline inflation in May. However, core inflation data could still persuade the ECB to hike rates during the summer.
- EurUsd adjusts to crucial support levels required for the continuation of the bull market. The currency reaction between 1.065 and 1.05 was mandatory to sustain the prevailing trend.
Post Debt Ceiling: The Spotlight Shifts to the Federal Reserve
Following an agreement, President Biden prevents default by raising the debt ceiling, pushing the issue to January 2025. This defers any risks associated with the 2024 presidential campaign, which markets have largely absorbed with nonchalance. However, the possibility of the first interest rate cut in the United States, currently projected for January 2024, is gradually receding – a fact met with overall market apathy.
The employment data, better than forecasted, brings attention back to the tension in the labor market, despite a slowdown in wage growth. In contrast, Germany officially enters a recession, necessitating the ECB to scrutinize the effects of rising interest rates.
Lagarde started to tighten monetary policy later than other central banks, but with the price of gas and oil no longer a concern, the June 15 meeting could be the last to see rates raised to 3.5%. The market, however anticipates another rate hike in the third quarter.
It’s noteworthy that European banks will need to repay €475 billion of Targeted Long-Term Refinancing Operations (TLTRO) loans, equivalent to 6% of the ECB’s assets, by the end of June. This situation may force many institutions to access the market for liquidity, adding further pressure on the cost of funds for European credit institutions.
Inflation data from major Eurozone countries (except Italy) indicate a considerable slowdown on an annual basis, albeit with core inflation data still robust and therefore closely monitored by the ECB. Coupled with macro data on industrial production and retail sales, these could potentially provide insightful clues on the future direction of EurUsd.
EurUsd and the Impending 30-week Moving Average Test
The 30-week moving average stands as a pivotal support level for EurUsd’s future trajectory. Breaching the 1.065 technical level would leave 1.05 as the last stand before a potentially significant downward turn for the euro, signifying the exhaustion of the rebound. The actions of central banks and the evolving yield spread between US and European government bonds over the forthcoming weeks will significantly dictate the outcome. Should the ECB halt rate hikes in June, it could prompt a favorable dollar reaction, risking the nullification of positive impacts on European inflation due to a strengthening dollar.
The divergences between the EurUsd exchange rate and overbought oscillators, like the RSI, were among the factors compelling us to adopt a conservative stance on the euro’s ascent. These divergences have now been rectified, yet they currently pose a threat of prematurely signaling a double top. A fall below 1.05 would spell disaster for the euro, plunging it back below parity. If the unfolding scenario echoes that of 2021, we’ll recognize it very soon.