US CPI, Minutes and ECB to Guide EURUSD

Markets will look to the upcoming ECB meeting for confirmation that the central bank intends to cut rates in June, while uncertainty has grown around the Fed's outlook.

Reasons for Fed Cut Delay

According to Fed funds futures, the probability of a June rate cut by the Fed has declined to 51%, down from 62% just one week ago. Recent comments from some Fed officials suggest more evidence of lower inflation is needed. While core CPI and PCE have trended in the right direction, higher headline inflation has caused concern. The fast measure is still expected to come in slightly higher. However, annual inflation is projected to drop 20 basis points. Meanwhile, fast and slow core measures are forecasted to rise 20 basis points after a strong NFP.

Traders will get to scrutinise the FOMC's meeting minutes after the release of CPI data on Wednesday. The last FOMC meeting saw policy unchanged despite hopes for a March rate cutback in late 2023. The dot plot of rate projections, which provides insights into members' views, could possibly provide clues about whether recent data may alter the outlook for three cuts this year. In the interim, the release of inflation data will be the focus.

ECB Expected to Signal June Cut

On the other side of the Atlantic, Eurozone inflation has been cooling faster than forecasted amid weak growth. While this could have led to expectations of earlier rate cuts, the ECB has consistently signalled it will wait for first-quarter data in May before acting, implying a June cut. The market anticipates this narrative will continue at the upcoming meeting on Thursday.

A belief that the ECB may ease before the Fed could hurt the EURUSD and resume its March decline. Both banks are expected to start cuts in June, but uncertainty around the Fed is growing following the last strong US labour data. Unless Eurozone growth rebounds sharply, the ECB will likely face more pressure than its US counterpart to stimulate its economy. This week's confluence of events could solidify this view and guide EURUSD going forward.​

EUR/USD to Confirm Inverse H&S?

The EUR/USD currency pair may have completed an inverse head-and-shoulders (H&S) pattern, pending further upside above 1.10. If consistent with the measured-move method, this would point at 1.1030. Reclaiming the swing of 1.0885 and sustaining a bullish trend above 1.0876 for a minimum of three days could validate the pattern and lead to initial resistance at 1.0943. Conversely, sliding lower could expose the pair to retesting the shoulder low of 1.08 and the head region near 1.0725, contingent on a break below 1.0821.​

Source: SpreadEx / EURUSD

Key Takeaways

While uncertainty has grown around the Fed's rate cut, markets will look to the upcoming CPI and ECB events to confirm which central bank intends to cut rates in June or first. Both banks anticipate beginning cuts in June, but uncertainty around the Fed is rising after strong US jobs data and rising inflation. The Fed's probability of a June cut has fallen, too, with CPI providing context for how this will fare ahead. Conversely, the ECB is still expected to signal a June rate cut at its upcoming meeting on Thursday, as Eurozone inflation has cooled faster than forecast. This could pressure the ECB and EURUSD unless Eurozone growth rebounds sharply.