The EUR/USD currency pair has experienced a decline below 1.0700, reaching the lowest level in over a month due to the weakening Euro amid uncertainty over the French elections. The Euro has been under pressure following French President Emmanuel Macron’s call for snap elections after losing to the far-right National Rally (RN). The possibility of a coalition government remains uncertain as recent polls show the RN party missing an absolute majority.
On the monetary policy front, ECB policymakers are cautious about subsequent rate cuts as they navigate towards the 2% inflation target, facing challenges with sustained wage growth. ECB governing council members have hinted at the possibility of future rate cuts if disinflation persists, but note that wage momentum remains strong. The path towards achieving the inflation target appears bumpy, raising concerns among policymakers.
The US Dollar has shown strength, pushing the EUR/USD pair lower as the US Dollar Index (DXY) reached a monthly high. Federal Reserve (Fed) policymakers have indicated a shift towards a less dovish outlook, forecasting only one rate cut this year compared to the previously expected three cuts. Market participants, however, anticipate two rate cuts based on soft inflation data for May, prompting expectations for rate cuts in September and potentially in November or December.
The recent US Producer Price Index (PPI) report showed unexpected contraction in headline inflation on a monthly basis, with both headline and core PPI decelerating annually. Despite softer inflation data, Fed Chair Jerome Powell remains optimistic about inflation moving in the right direction. Investors are closely watching inflation indicators to gauge the Fed’s future policy decisions, with expectations of further rate cuts later in the year.
In terms of technical analysis, the EUR/USD pair has broken below the round-level support of 1.0700, signaling a shift towards a bearish trend. The pair failed to sustain a Symmetrical Triangle breakout, falling back into the triangle formation. Support is expected around 1.0636, near the upward-sloping border of the pattern. The long-term outlook has turned negative as prices dip below the 200-day Exponential Moving Average (EMA), suggesting a bearish momentum.
Economic indicators, such as the Producer Price Index (PPI), play a crucial role in determining market sentiment. The PPI measures average price changes in primary markets by producers and is closely monitored as an indicator of commodity inflation. A high reading is viewed as positive for the USD, while a low reading is seen as negative. Investors will continue to track economic indicators and central bank announcements to assess the impact on currency pairs like the EUR/USD.
