EUR/USD: Stabilizes Near 2-Month Low Amid ECB Rate Hike Evaluation, Debt Ceiling Bill

Highlights

• Euro strengthens despite weaker Euro Zone inflation and higher Treasury yields.
• Traders evaluate ECB rate hike trajectory, while investors await debt ceiling bill approval.
• Euro and dollar remain stable, but uncertainty arises due to easing inflation and market challenges.

Overview

Despite higher Treasury yields and weaker-than-anticipated Euro Zone inflation readings, the Euro is gradually strengthening against the U.S. Dollar on Thursday.

Traders are currently evaluating the potential for the European Central Bank (ECB) to ease its aggressive rate hike trajectory, while investors are eagerly anticipating the U.S. Senate’s approval of the debt ceiling bill. As a result, both currencies are currently in a state of stability and indecision.

At 10:01 GMT, the EUR/USD is trading 1.0709, up 0.0023 or +0.22%. On Wednesday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $98.73, down $0.38 or -0.38%.

Euro Stabilizes Near Two-Month Low, ECB Cautious on Future Rate Hikes

On Thursday, the euro stabilized near a two-month low as euro zone inflation decreased more than expected. This reinforces the case for the European Central Bank (ECB) to proceed cautiously with future rate hikes. In May, euro zone inflation dropped to 6.1% from April’s 7.0%, falling below the anticipated 6.3% as per economists surveyed by Reuters.

The EUR/USD traded at $1.0690, remaining relatively unchanged and hovering close to Wednesday’s two-month low of $1.0635. The subdued inflation figures indicate that the ECB may face reduced pressure to continue its monetary tightening efforts. Over the past year, the ECB has already increased base rates by a total of 375 basis points to 3.25% in an effort to combat rising prices.

Market expectations currently suggest an 85% probability of a 25 basis points rate hike during the ECB’s meeting on June 15. However, the easing inflation has introduced uncertainty regarding the possibility of two subsequent rate hikes of 25 basis points, posing challenges for the euro in the current market.

ECB Vice-President Luis de Guindos stated that while the central bank’s monetary policy tightening is nearing its end, the cycle has not yet concluded entirely.

Dollar Retreats from Peak, Debt Ceiling Bill Raises Support Prospects

Following the U.S. House of Representatives’ approval of a debt ceiling suspension, the dollar experienced an increase but retreated from a two-month peak as investors scaled back their expectations of an interest rate hike by the Federal Reserve this month. The bill to suspend the $31.4 trillion debt ceiling was passed by the divided House, shifting attention to its prospects in the Democratic-led Senate just days before the federal government is expected to exhaust its funds for bill payments.

Analysis suggests that the U.S. government will likely avoid a default scenario, which could have significant repercussions for the U.S. and global economies. If the vote proves successful, the dollar could receive modest support.

Fed Officials Considers Skipping June Rate Hike Amid Inflation Concerns

Federal Reserve officials, including the incoming vice chair, have indicated the possibility of forgoing a rate hike in June, allowing the central bank to assess the impact of its ongoing tightening measures given persistent high inflation data.

Market expectations now indicate a 37% likelihood of a 25 basis points rate increase at the upcoming Fed meeting, compared to a nearly 67% probability recorded the previous day, according to the CME FedWatch tool.

Short-Term Forecast:  Bearish

Based on fundamental analysis, the short-term forecast for the EUR/USD leans toward a bearish outlook. Considering these factors, it suggests that the euro may face downward pressure, while the dollar could receive some support. Monitoring inflation data, central bank statements, and the outcome of the debt ceiling bill in the Democratic-led Senate is crucial as they can impact the EUR/USD and potentially alter the forecast.

Technical Analysis

The EUR/USD is trading higher on Thursday, but on the bearish side of 1.0807 (PIVOT). Although the trend is down, the chart pattern suggests momentum may be getting ready to shift to the upside.

With the  trend down, sellers are likely to come in on the first test of 1.0807 (PIVOT). However, overtaking it will indicate strong counter-trend buying with 1.0979 (R1) the next target.

The inability to overcome 1.0807 (PIVOT) will signal the presence of strong sellers. This could trigger a resumption of the downmove with 1.0522 (S1) the next support target.

For a look at all of today’s economic events, check out our economic calendar.