Amidst the monetary policy divergence between the ECB and the Fed, the EUR/USD stands as a pivotal focal point. The currency pair's trajectory hinges significantly on the Fed's stance and the ECB's ability to align with it.

Christine Lagarde, head of the ECB, has raised concerns regarding potential euro depreciation and its repercussions, particularly in the face of soaring commodity prices. Despite her apprehensions, Credit Agricole expresses doubt about market reactions, hinting at possible challenges to Lagarde's resolve.

Recent data shed light on the exchange rate pass-through effect (ERPT), revealing a waning impact of a weaker euro on inflation in the eurozone compared to previous years. For instance, a 10% devaluation of the euro's nominal effective exchange rate (NEER) is now projected to elevate overall CPI by merely 0.2-0.3% over four quarters, a decline from the 0.5% observed previously.

Despite the EUR/USD's weakness, the euro's NEER has shown remarkable resilience, suggesting a containment of direct inflationary impacts.

Looking ahead, the release of the Eurozone's preliminary Harmonized Index of Consumer Prices (HICP) for April is anticipated to underscore ongoing disinflationary trends. This reinforces expectations of an ECB rate cut in June, followed by additional easing measures later in the year.

Based on these factors, EUR/USD is expected to remain a sell on rallies this week, with any upward movements likely to be short-lived. The net speculative position for the EUR has shifted to a sell position of 9,989 contracts, marking the first net sell position since September 2022, after being bought at 12,224 contracts in the previous week.

EURUSD Downtrend Can Continue and Fall to 1.05

Apr 29 2024

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