Yesterday, the Fed left interest rates unchanged at 5.25-5.50% as expected but delivered some dovish surprises compared to the hawkish expectations. In fact, although the recognized the recent slowdown in the disinflationary progress in the statement, they also signalled a bigger than expected QT tapering on Treasuries (from $60 billion to $25 billion vs. $30 billion expected) starting in June. Fed Chair Powell has also repeatedly pushed back against a rate hike as he said that they needed persuasive evidence to hike rates again.
The latest Eurozone CPI came in line with expectations although we got a slight beat on the Core measure which triggered a short term bid in the Euro. This doesn't change anything for the ECB as they have already telegraphed the June rate cut. Going forward though, if inflation rebounds, then we should see the market pricing out some of the rate cuts expected for the rest of the year.
EURUSD Technical Analysis - Daily Timeframe
On the daily chart, we can see that the pair continues to consolidate just beneath the key 1.0727 level as it looks like a retest after the breakout triggered by the hot March US CPI. This is where the sellers are piling in with a defined risk above the level to position for a drop into the 1.05 handle. The buyers will need to see the price breaking higher to step in with more conviction and target a rally into the trendline around the 1.08 handle.
EURUSD Technical Analysis - 1 hour Timeframe
On the 1 hour chart, we can see more closely the recent rangebound price action with the market just waiting for a catalyst to push in either direction. In fact, the baseline expectations are 3 rate cuts for the ECB and 1 rate cut for the Fed. This is already priced in and we need something to change those expectations to see another sustained move. We will likely continue to range here between the 1.0727 resistance and the support levels around the 1.0680 and 1.0650 going into the NFP and ISM Services PMI data tomorrow. Traders can "play the range" by buying at support and selling at resistance, although waiting for a catalyst might be a better idea.
What could be the next catalyst?
Today the only notable release will be the latest US Jobless Claims figures, but they are unlikely to change much for the market as we are accustomed to see Initial Claims hovering at cycle lows and Continuing Claims ranging around the 1800K level. Therefore, the data to watch next will be the US NFP and ISM Services PMI tomorrow.
For the NFP, the main focus should be on the Average Hourly Earnings as a resilient labour market with falling wage growth is good for growth and inflation. On the other hand, if we were to get a hot report all around, then the market would take that as hawkish stuff. For the ISM Services PMI, the main focus should be on the prices and employment components. If you recall, we got a strong dovish reaction last time when the prices index dropped to the lowest level in 4 years. If we get another drop or at least not a big change from the current levels, then the market might take that as good news for inflation and even if the headline number beats, it could lead to a positive risk sentiment.
Positive risk sentiment could lead to some broad USD weakness and see the EURUSD pair rallying into the 1.08 handle. Conversely, hot wage growth or inflation data will likely trigger a hawkish reaction and give the USD another tailwind to gain across the board with the EURUSD pair starting to move towards the 1.05 handle.
