Financial markets commenced the week cautiously, with multiple central banks poised to announce their monetary policy decisions in the coming days. EUR/USD slipped below its support level at $1.0880 (14-day SMA) as investors scaled back expectations of a June rate cut by the Fed, yet it continued to trade steadily above the $1.0850 barrier.
As anticipated, the final Eurozone inflation rate for February was confirmed at 2.6% y/y (a 3-month low), indicating ongoing disinflation in the euro area. While lower inflation is deemed necessary, it alone does not suffice for the European Central Bank to lower its policy rates from the historically high 4%. The Governing Council is closely monitoring wage developments to assess whether domestically driven cost pressures are subsiding in a sustainable manner. Should wage growth continue to moderate, as anticipated, the first rate cut is likely to occur in June. Interest-rate traders are positioning for a rate cut in Q2, with an anticipated 85 basis points of cuts by year-end, with a 63.8% probability of a rate cut in June.
What can we anticipate heading into FOMC decision week? Over the past 14 meetings, EUR/USD has typically closed within a 0.3% band of the day's bid open on the eve of the Fed decision, with no statistically significant trend indicating a marginally bullish or bearish trajectory. With overnight ATM options for EUR/USD not pricing in increased volatility, we expect the euro to maintain a neutral stance against the US dollar, with investors hesitant to initiate large last-minute positions. Consequently, it's possible that markets may not react significantly to today's Eurozone wage growth report and German ZEW survey, choosing instead to await the FOMC decision on Wednesday. The target range for EUR/USD today is $1.0840 to $1.0900, although sentiment remains bearish.
