During differing monetary policies between the ECB and the Fed, the EUR/USD exchange rate holds significant sway. Its trajectory heavily relies on the stance of the Fed and the ECB's efforts to synchronize with it.

Christine Lagarde, leading the ECB, has voiced concerns about potential depreciation of the euro and its potential consequences, particularly against the backdrop of rising commodity prices. However, Credit Agricole casts doubt on market reactions, suggesting possible challenges to Lagarde's stance.

Recent data on the exchange rate pass-through effect (ERPT) has revealed a diminishing impact of a weaker euro on inflation in the eurozone compared to previous periods. For instance, a 10% devaluation of the euro's nominal effective exchange rate (NEER) is now projected to lift overall CPI by only 0.2-0.3% over four quarters, down from the previously observed 0.5%.

Despite weakness in the EUR/USD, the euro's NEER has shown resilience, indicating a containment of direct inflationary pressures.

Looking forward, the release of the Eurozone's preliminary Harmonized Index of Consumer Prices (HICP) for April is expected to underscore ongoing disinflationary trends. This strengthens the anticipation of an ECB rate cut in June, followed by further easing measures later in the year.

Considering these factors, it's anticipated that EUR/USD will continue to be sold 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 Is a good Short on Rallies this Week

May 09 2024

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