The EUR/USD currency pair has concluded its third week in a row with minimal fluctuations, hovering around 1.0820, and encountering resistance near the 1.0900 mark for the fourth consecutive week. Despite various significant events, there has been no substantial directional momentum for the pair, leaving investors uncertain about future economic conditions. Questions linger on whether central banks will intervene promptly to prevent economic downturns or if premature actions might reignite inflationary pressures.
It is evident that policymakers have placed their bets and appear resolute in their decisions, yet further clarity on the future is necessary.
European Central Bank Adjusts Interest Rates
On Thursday, the European Central Bank (ECB) disclosed its monetary policy decision, reducing interest rates by 25 basis points across the board. The rates for the main refinancing operations, the marginal lending facility, and the deposit facility were adjusted to 4.25%, 4.5%, and 3.75%, respectively.
However, the market interpreted this as a cautious reduction, with ECB President Christine Lagarde signalling a tempering of expectations for another rate cut in July. Instead, she indicated that future decisions would be data-dependent, hinting at a possible rate reduction in September.
The ECB’s revised macroeconomic projections show an improved real GDP growth forecast for 2024, a slight decrease for 2025, and no change for 2026. Inflation projections have been raised to 2.5% for 2024 and 2.2% for 2025, with the 2026 forecast remaining at 1.9%.
The EUR/USD pair experienced some demand following the ECB’s announcement but remained below the 1.0900 level, aligning with market expectations.
US Employment Data Precedes CPI and Federal Reserve Decisions
In the US, employment data took centre stage. The April JOLTS report indicated a decrease in job openings to 8.059 million. The ADP survey reported the creation of 152K new jobs in May, falling short of expectations, and revealed a 5% increase in annual pay. Additionally, initial jobless claims rose to 229K for the week ending May 31.
The May Nonfarm Payrolls report was a highlight, with the addition of 272K new jobs, surpassing forecasts. The unemployment rate edged up to 4%, and the labour force participation rate dipped to 62.5%. Average hourly earnings increased by 4.1% year-over-year and 0.4% month-over-month, exceeding predictions.
Following these reports, the US Dollar strengthened, and the EUR/USD pair pulled back to the 1.0820 region, consistently unable to breach the 1.0900 barrier. The data suggests that the Federal Reserve is unlikely to cut interest rates, given the persistent inflation and a tight labour market.
Federal Reserve’s Upcoming Policy Meeting
The Federal Open Market Committee (FOMC) is scheduled for a two-day meeting next week, with a monetary policy announcement expected on Wednesday. The committee has delayed easing monetary policy due to ongoing inflationary concerns. Market participants anticipate no changes until September, maintaining the benchmark interest rate at 5.25% – 5.50% for the seventh consecutive session.
The Fed’s dual mandate focuses on achieving maximum employment and controlling inflation. The May CPI is projected at 0.2% month-over-month and 3.4% year-over-year, but these figures are not the sole basis for the Fed’s decisions.
The Fed instead considers the PCE Price Index, which remained at 2.7% year-over-year in April, with the core reading at 2.8%, in line with expectations. The PCE inflation rose 0.3% monthly, while the core figure was slightly below forecasts at 0.2%.
The upcoming week’s economic calendar includes Germany’s HICP for May and the US PPI for the same month. The preliminary June Michigan Consumer Sentiment Index is also set for release, anticipated at 73.0, up from 69.1 in May.