As traders remain optimistic of a Federal rate cut this September, EUR/USD has approached 1.0800 levels as traders continue to push forward for action from policy makers.

EUR/USD rose to 1.0790 as US data softening led the dollar’s decline, according to Stournaras of ECB Stournaras saw central banks reduce interest rates three times this year and weak labor market data and poor ISM Services PMI worsening economic prospects of America.

EUR/USD reached 1.0790 during Monday’s European session as the major currency pair rose against its US Dollar counterpart due to speculation of Federal Reserve (Fed) interest rate cuts starting September meeting, further pressuring Euro. As there is little in terms of high quality data due to European Central Bank (ECB) policy normalization shift expected at their June meeting influencing speculation on future interest rate stance will affect Euro movements as speculation about these shifts are anticipated by market watchers and affect Euro prices accordingly.

Policymakers at the European Central Bank (ECB) remain divided about extending its interest rate-cut cycle post-June meeting, although some believe extending cuts past July could revive price pressures. A few policymakers believe extending rate cuts until then might boost price pressures; and Bank of Greece Governor Yannis Stournaras suggested in an interview with Greek media that three rate cuts this year is more likely than four, due to Europe’s economic rebound during Q1: GDP increased 0.3% between January-March compared with expectations of 0.1% growth during Q1.

Daily Market Movers: EUR/USD gains as US Dollar losses ground

As the US Dollar declines following US labor market data and ISM Services Purchasing Managers Index (PMI) results for April released last Friday, EUR/USD has gained strength as its currency loses ground against it. Nonfarm Payrolls report showed significantly less job gains than anticipated while wage growth softened both monthly and annually.
Due to improving labor market conditions, the US Dollar Index (DXY) experienced its first fall since June at almost four-week low of 104.60; however, quickly rebounding as ISM Services PMI showed businesses paying higher input prices.
ISM Services Prices Paid increased from 53.4 in April, suggesting persistent inflationary pressure. Most inputs into the service sector come in the form of employee salaries which drive consumer spending which eventually pushes prices higher; although ISM’s Services PMI, which measures this sector accounting for two-thirds of economic output, fell below 500.0 threshold at 49.4 — its lowest reading since December 2022.
Easing labor market conditions and weak ISM Service PMI data has raised fears over US economic prospects and increased speculation of interest rate reduction at September meeting by Federal Reserve. CME FedWatch tool indicates traders see 70% chances that rates may drop from actual levels by September meeting.
Contrary to market expectations, Federal Governor Michelle Bowman stated on Friday she may increase interest rates further if progress in decreasing inflation to 2% either stalls or reverses, according to Reuters reports. She believes inflation will decline even with current interest rate levels remaining the same.

Technical Analysis: EUR/USD remains above 20-day Exponential Moving Average

Monday saw EUR/USD extend its winning streak into its fourth trading session but remain within Friday’s range, showing sideways action. Near-term prospects appear positive given that it trades above its 20-day Exponential Moving Average (EMA), currently trading around 1.0730.

EUR/USD has experienced a sharp volatility reduction due to a daily Symmetrical Triangle formation. The upward-sloping border of this triangle pattern begins from October 3 low at 1.0448 while December 28 high around 1.1140 marks its downward-sloping border.

Relative Strength Index (RSI) measurements indicate an indecisive mood among market participants and move between 40.00-60.00 levels, suggesting indecision among traders and investors alike.

ECB FAQs
The European Central Bank (ECB), located in Frankfurt, Germany, serves as the reserve bank for Eurozone countries and manages monetary policy within them. Their primary task is achieving price stability – keeping inflation around 2% with rising or lower interest rates being their primary tool to do this – typically leading to stronger Euros from relative higher rates and vice versa. Their Governing Council meets eight times each year and makes decisions through votes cast by heads of Eurozone national banks as well as six permanent members (including Christine Lagarde who serves as President) who make decisions before being presented directly by Christine Lagarde herself!

Quantitative Easing (QE), is an unconventional policy tool of the European Central Bank in extreme situations that allows it to achieve price stability more quickly than simply by lowering interest rates alone. QE involves printing Euros and purchasing assets such as government or corporate bonds from banks and financial institutions using them – usually government or corporate debt from government departments – from them. QE typically results in weakening of the Euro. In 2009-11 during the Great Financial Crisis when inflation stubbornly remained below target and 2015 when covid pandemic outbreak occurred – QE was used during these cases as it provided price stability goals more quickly by way of printing Euros to purchase assets from banks & financial institutions vs just cutting interest rates could not.

Quantitative tightening (QT), is the opposite of quantitative easing (QE). QT typically takes place following QE when economic recovers is underway and inflation rises; rather than buying government and corporate bonds from financial institutions to provide liquidity, in QT the European Central Bank stops buying these new bonds altogether; instead it ceases reinvesting maturing principal maturing on bonds already held, usually having positive ramifications on Euro value.