Talking Points

• ECB Main Refinance Rate and EU Inflation
• EUR/USD Technical Analysis – Daily Chart

Inflation Monitor Source: Bloomberg Finance L.P.

ECB Main Refinance Rate and EU Inflation

The European Central Bank is scheduled to announce its main refinancing rate on its June 6th, 2024 meeting, traders around the world are looking forward to the central bank’s decision and how it may impact the EURO exchange rate against other currencies. The current main refinancing rate is 4.5%. According to multiple media sources, it is widely anticipated that the central bank will announce a 25 basis point rate cut, taking the main refinance rate down to 4.25%. Should this rate reduction materialize, the ECB would surpass the Federal Reserve (FED) in implementing rate cuts, as the FED remains hesitant to do so. Overall, the ECB’s rate decision is a significant event that is likely to have a number of consequences for the eurozone economy and the foreign exchange market.

According to Bloomberg Analysts surveys, 99.5% of market participants expect a 25 basis points cut on the June 6th meeting, and less than 1% expect a cut for ECB’s July 2024 meeting. The remainder of the year includes mixed views on the ECB’s future rate cuts for 2024. This indecision regarding the 2024 rate cut path may prompt traders to scrutinize the language employed in the forthcoming monetary policy statement as well as the comments and responses of President Christine Lagarde during the ECB’s press conference following the release.

The Euro Zone’s inflation rate experienced an increase in May, with the Consumer Price Index (CPI) reaching 2.6% year-on-year (Y/Y), up from 2.4% in April. Core inflation, based on Eurostat data, also exceeded expectations. This upward trajectory in inflation is a critical factor that could influence the ECB’s future monetary policy decisions. While market sentiment leans toward a potential ECB rate cut in June, the recent increase in EU inflation raises questions about the ECB’s future rate cuts for 2024. The latest CPI increase was primarily driven by rising costs of housing, electricity, gas, and other fuels. However, oil prices have declined in the days following the release of the EU inflation report. The current CPI reading approximates the pre-pandemic average lows.

The EUR/USD exchange rate has witnessed a remarkable increase of nearly 3% since its low of 1.0606 in mid-April 2024, reaching a high of 1.0915 before encountering selling pressure that pushed the price back to the 1.0870 range. The EUR/USD’s recent uptrend persists ahead of the ECB’s meeting. However, several significant resistance levels lie ahead.

The latest COT report for the week ending on May 31st, 2024 (Includes data up to the end of day Tuesday, May 28th, 2024) reflects that the Asset Manager/Institutional and Leveraged Funds categories positioning moved toward long territory after remaining near an intermediate-long extreme level for several weeks. Commercial positioning shifted to shorting, which aligns with recent price action.

Source: TradingView

EUR/USD Technical Analysis – Daily Chart

• Price action broke out of and closed above the upper border of the narrowing formation; and a throwback took place, along with a shortfall as buyers entered the market above a weekly pivot point of 1.0797 forming an intermediate double bottom formation above the breakout level.
• Price action broke out above the resistance level of the intermediate double bottom formation, and has attempted another throwback to the breakout level.
• A confluence of support represented by the weekly pivot point, a monthly support level, the SMA9, and the EMA9 lies below price action within the range of 1.0840-1.0860 area.
• Price continues to trade above its EMA9, SMA9 and SMA21.
• Non-smoothed RSI7 aligns with price action and currently near its neutral level.
• A potential triple bottom formation lies within the narrowing formation pattern. If the breakout remains intact, we may consider watching for the pattern completion. (Blue circles). 

Weekly Chart update

• Price action broke and remained below the lower border of an ascending channel. A pullback has materialized and price action has made it back to the previously broken trendline. It is unchanged from last week, and maybe critical to monitor price behavior at this level.

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