EurUsd Weekly Outlook for May 13, 2024 – Eyeing Rate Cuts in Europe

• American Market Waits for Inflation Data: As the market anticipates crucial inflation data, the prevailing sentiment is that the Federal Reserve will only start cutting rates from September. Strong economic growth forecasts seem to support this view.
• Mixed Signals from Europe: In Europe, mixed macroeconomic data seems to support the belief that the European Central Bank (ECB) will initiate a rate cut in June. However, the outlook for the following months remains uncertain.
• EurUsd Continues Its Sideways Movement: The EurUsd pair continues its low volatility sideways trend, now expected to enter a phase of a weaker dollar, although still within a relatively narrow and non-directional range.

Markets Strategize Ahead of Crucial Inflation and Sales Data

During a week sparse in significant data, the market is tactically positioning itself in anticipation of upcoming inflation and retail sales data, which will more accurately define interest rate expectations for the latter half of 2024. The market currently anticipates with considerable certainty a few Federal Reserve actions from September onwards. Inside the American central bank, a tone of caution still prevails. Current macro data does not suggest any urgency to reduce interest rates, and as always, incoming market information will clarify whether a rate cut is necessary. The Atlanta Fed’s forecast of a 4.2% quarterly real economic growth for Q2 2024 has not positively influenced these expectations.

In Europe, economic indicators are mixed. Good news from retail sales contrasts with weaker March data on industrial production. Spain and Germany, in particular, are seeing a decline in their indicators, with the latter suffering due to a combination of a weak automotive sector and sluggish demand from the significant Chinese market. This is compounded by a restrictive monetary policy, which might, however, lead to a rate cut in June. Following rate cuts in the Czech Republic, Switzerland, and Sweden, Europe might see further easing from the ECB in the upcoming meeting.

Technical Analysis – Indicators Signal Caution for Dollar Investments

Despite the current season not historically favoring the dollar, technical analysis also suggests that the greenback needs a reset after recent gains. This is indicated by the Relative Momentum Index (RMI). Similar to the more famous RSI, the RMI shows what happens to the Dollar Index after it reaches the overbought threshold of 70 points. Besides regularly intercepting market tops, the indicator sends a clear message: before going long on the dollar, it is prudent to wait for the RMI to return to the oversold territory. The conclusion is that it is still premature to go long on the dollar at this time.

The weekly Bollinger Bands chart confirms EurUsd’s uncertainty in taking a definitive direction. As clearly seen in the chart, since the beginning of 2023, the exchange rate has fluctuated within a tight range between 1.05 and 1.10, preventing a more precise directional movement. For now, only tactical approaches are advisable, going long or short depending on the affected support/resistance levels.