Dovish Signalling

EURUSD has come under fresh selling pressure today on the back of the ECB rate decision yesterday. While the bank held policy on hold as expected, it hinted that rate cuts are expected this summer if inflation continues to develop in line with its forecasts. Commenting on the current inflation environment, Lagarde noted that “Without being triumphant, or celebrating anything yet, what we are observing is a decline of inflation, a disinflationary process that is in progress.”

June Easing Expectations

The bank has previously hinted at June as being a likely action point for commencing easing and with the next set of forecasts due at that meeting, traders are now expecting a quarter-point reduction, barring any upside surprises in inflation.  The continued fall in eurozone inflation is at odds with what we are seeing in the US where CPI has risen over the last three months. Indeed, delayed Fed easing by the Fed has been flagged as a key risk to the dovish ECB outlook.

ECB & Fed

When questioned on the ECB’s reliance on the Fed (typically following the US central bank in monetary policy changes), Lagarde said “We are not Fed-dependent. The United States is a very large market, a very sizable economy, a major financial center as well so all that finds its way into our projection.”

Bearish Outlook

Looking ahead, EURUSD remains vulnerable to further downside as traders continue to price in ECB rate cuts over coming months while at the same time pushing out expected US easing projections until later in the year. Until US inflation starts to fall again, EURUSD looks likely to remain pressured lower.

Technical Views

EURUSD

The sell off in EURUSD this week has seen the market breaking down beneath the 1.0724 level. With momentum studies bearish, the focus is on a continuation lower while below this level with 1.0515 the next target for bears. Bulls will need to see price back above the broken bull channel lows to alleviate near-term bearishness.