Euro at mercy of rate hikes

Published on 26.03.2024 09:13

The Euro continues to move higher as we enter today’s European trading session, remaining above the 1.08 mark, building on yesterday’s gains after as traders continue to position themselves for potential rate cuts from the US Federal reserve and European central bank.

Despite the optimistic outlook about the US economic growth, market participants remain hesitant in taking long positions in the greenback as uncertainty remains in the timing of the first interest rate cut by the Fed.  The US central bank said last week that it remains on track to cut interest rates by 75 bps this year. That said, several Fed officials expressed concern about sticky inflation and stronger-than-expected US macro data. This, in turn, holds back traders from placing fresh USD directional bets and leads to the EUR/USD pair's subdued/range-bound price action.

The shared currency, on the other hand, is undermined by bets for a June rate cut by the European Central Bank (ECB). In fact, Bank of Italy Governor Fabio Panetta said on Monday that the ECB is moving towards an interest rate cut as inflation is falling rapidly and approaching the 2% target. Separately, ECB chief economist Philip Lane noted that the central bank can consider reversing interest rates once it becomes more confident that wage growth is slowing and inflation is heading back to the 2% target as projected. This further contributes to capping the upside for the EUR/USD pair.

Looking further ahead today, the main drivers of the EUR/USD currency pair will be the release of the Durable Goods Orders, the Conference Board's Consumer Confidence Index and the Richmond Manufacturing Index  during the North American session. This, along with the US bond yield and the broader risk sentiment, will drive demand for the safe-haven buck and provide some impetus to the EUR/USD pair. The market focus, however, will remain glued to the release of the US Personal Consumption and Expenditure (PCE) Price Index – the Fed's preferred inflation gauge on Friday.