The ECB is preparing to implement its first rate cut after aggressively hiking borrowing rates to curb inflation. However, market reaction might be subdued since many officials have indicated June as the ideal time to start lowering rates. Consequently, more attention will likely be on the future rate cut trajectory. Yet, ECB officials have advised against expecting consecutive rate cuts at upcoming meetings. Instead, they have communicated a more measured approach, suggesting that there may not be a significant amount of new information this Thursday.

EUR/USD has risen on the back of softer US data, attempting a bullish breakout. So far, conviction has been lacking. Testing the channel resistance (now immediate support) could indicate if the move has the momentum to follow through. For a sustained move higher, US data needs to weaken further, potentially aided by a hawkish cut from the ECB – a difficult feat. The committee will likely aim to deliver a balanced and cautious message regarding future cuts.

EUR/USD downside faces several challenges. Firstly, the dollar shows little bullish impetus, and secondly, markets have already priced in a 25 basis point cut in Europe, yet the pair continues to rise. Nevertheless, a return to 1.0800 and channel support remains a key area for bears.

EUR/USD IN FOCUS AHEAD OF THE HIGHLY ANTICIPATED RATE CUT

Jun 05 2024

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