EUR/USD retreats ahead of Eurozone, US data-packed week

• EUR/USD struggles to hold gains above 1.0700 amid uncertainty ahead of key economic events.
• The ECB seems poised to start reducing key borrowing rates in June.
• Eurozone’s CPI, Q1 GDP and the Fed’s policy outlook will be in focus.

The EUR/USD pair struggles to sustain above the round-level resistance of 1.0700 in Monday’s early American session. The major currency pair exhibits caution ahead of the release of key economic indicators in the Eurozone, such as preliminary Eurozone Q1 Gross Domestic Product (GDP) and the Consumer Price Index (CPI) data for April, which will be published on Tuesday. 

Eurozone’s economic data will influence speculation about interest rate cuts by the European Central Bank (ECB). Currently, investors’ expectations that the ECB will start to cut its Main Refinancing Operations Rate from the June meeting strengthened as policymakers see them as reasonable.

Last week, Banque de France Governor and ECB Council member François Villeroy de Galhau said there is no need to wait much longer to start interest rate cuts if other things remain constant. Villeroy expects that energy prices are unlikely to rise further despite Middle East tensions and, hence, should not impact the ECB’s plans to pivot to interest rate cuts starting in June.

While a rate-cut move in the June meeting is widely expected, there is uncertainty over whether the ECB will extend the rate-tightening campaign. ECB policymakers share different opinions on that as Villeroy said last week: “June rate cuts should be followed by further cuts, at a pragmatic pace.” On the contrary, ECB policymaker and Bundesbank Chief Joachim Nagel said last week that a June interest rate cut may not necessarily be followed up by a series of rate cuts. Nagel remains worried about higher service inflation due to strong wage growth. He is not fully convinced that inflation will actually return to target in a timely and sustained manner. 

Meanwhile, the German preliminary inflation data for April remains mixed. The annual Harmonized Index of Consumer Prices (HICP) grew at a higher pace of 2.4% from expectations and the prior reading of 2.3%. The monthly HICP rose steadily by 0.6%. Annual core CPI that strips off volatile food and energy prices grew steadily by 2.2%, while economists forecasted the underlying inflation have grown at a higher pace of 2.3%. Monthly core CPI rose at a slower pace of 0.5% from the estimates of 0.6%.

Daily digest market movers: EUR/USD falls from day's high ahead of German data

• The EUR/USD falls from the intraday high of 1.0734. The major currency pair fails to hold gains as the US Dollar rebounds amid uncertainty ahead of a data-packed week
• The US Dollar remains on the backfoot due to uncertainty over the US economic outlook. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, fell to 105.60 as weak preliminary US economic indicators such as the S&P Global Purchasing Managers’ Index survey for April and Q1 GDP have raised concerns over the economy’s strength in coping with higher interest rates by the US Federal Reserve (Fed).
• The next move in the US Dollar will be guided by the Fed’s monetary policy decision, which will be announced on Wednesday. The US central bank is widely anticipated to keep interest rates steady in the range of 5.25%-5.50%. Therefore, investors will focus on the Fed’s guidance for interest rates. Considering the hot Q1 GDP Price Index and higher-than-expected US core Personal Consumption Expenditure Price Index (PCE) data for March, the Fed has no option but to deliver hawkish guidance on interest rates.
• Fed policymakers are expected to reiterate the need to maintain interest rates at their current levels until they get confidence that inflation will come down sustainably to the desired rate of 2% target. Investors will focus on whether the Fed remains committed to three rate-cut projections during 2024. Actually, the CME FedWatch tool shows that the US central bank will only make two rate cuts this year, and the September meeting is likely to be chosen as the earliest point.

Technical Analysis: EUR/USD trades close to 1.0700

The EUR/USD attempts to establish firm footing above the 1.0700 hurdle. The shared currency pair extends its recovery from 1.0600 to 1.0700, but the near-term outlook is still uncertain. The 20-day Exponential Moving Average (EMA) near 1.0720 remains a major barricade for the Euro bulls. The 200-day EMA near 1.0800 is declining, suggesting that the long-term appeal is bearish. 

The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, indicating a consolidation ahead. 

The holistic view of the EUR/USD pair indicates a sharp volatility contraction due to a Symmetrical Triangle formation on a daily timeframe. The upward-sloping border of the triangle pattern is plotted from the October 3 low at 1.0448, and the downward-sloping border is placed from the December 28 high around 1.1140.