EURUSD Outlook Ahead of FOMC and ECB

Available data suggests that the European Central Bank (ECB) and Fed aim to keep the current interest rate policy unchanged this week. Still, both announcements may provide clues about the future course of monetary policy.

Eurozone Inflation Aligns With Forecasts

The latest eurozone inflation data on Monday confirmed market expectations. CPI rose 2.6% year-over-year (YOY) in February versus 2.8% prior. This leaves little doubt the ECB will keep rates on hold at its policy meeting on Thursday. While some uncertainty remains around the timing, most analysts expect the first rate cut will likely occur in June. Given the broad consensus on rate policy, the euro may face downward pressure against the dollar in the near term.

Turning to the Fed on Wednesday, the bank is also widely anticipated to keep rates on hold. However, market participants will want to examine any economic projection updates closely. After several months of inflation exceeding forecasts and jobs growth surpassing estimates, the Fed may trim expectations for further rate cuts going forward. The statement will be parsed for any signals regarding the path of US monetary policy in the coming quarters.​

It's All About Timing and Quantity

Current market expectations anticipate the FOMC to cut following the June policy meeting at the earliest. The market also expects the Fed to complete three rate cuts by the end of the year, totalling 75 basis points. This would be generally consistent with previous forecasts from the last meeting, albeit with a slightly later shift toward easing. This represents a significant change for the market, which had previously priced in twice as many rate cuts starting as early as March. Investors will now focus on whether the Fed's "dot plot" matrix maintains the three projected rate cuts or narrows to two cuts, which could signal a more hawkish stance.

Despite the retreat in easing projections, US bond yields have not risen to levels seen last year. Part of this may be attributed to less Treasury debt issuance in the first quarter than in prior quarters. As a result, the US dollar has seen less appreciation against the euro. Looking ahead, market participants will analyse the timing signals from central banks to determine which institution suggests easing policy moves into the near future.​

EURUSD in H&S or Rising Flag

The rise of EURUSD to 1.098 coincided with a parallel resistance trendline of a potential head-and-shoulders (H&S) support neckline starting at 1.069. If sellers regain control below 1.0795 and the neckline, prices may decline to 1.06 or lower. However, if support holds, it could allow the euro to rise past 1.098 and 1.1017 and even reach the prior peak of 1.115, invalidating the head-and-shoulders pattern and increasing the likelihood of a flag formation ending at 1.07.

Source: SpreadEx / EURUSD

Key Takeaways

Both the ECB and Fed aim to hold rates at their upcoming meetings, though there is anticipation for clues about future easing. For the ECB, inflation remained aligned with expectations, leaving rate expectations unchanged. At the same time, the market expects the Fed's first rate cut in June and only three total reductions for 2024. This is much lower than prior expectations, so the Fed may adjust its projections to reflect fewer cuts. Investors will watch both central bank communications for signals on the timing of future easing actions.​