Euro can’t find its footing after ECB pause

The euro continues to stumble and is down for a fourth straight day. In the European session, EUR/USD is trading at 1.0653, down 0.67%. The euro has fallen 1.7% this week as the US dollar continues to flex its muscles against the major currencies.

ECB holds rates, hints at a June cut

The European Central Bank maintained the deposit rate at 4% for a fifth straight time on Thursday, as expected. Interest rates remain at record levels but Lagarde & Co. provided fresh hints that policy makers are looking to lower rates at the June meeting.

The economic background appears favorable for a rate cut. Eurozone inflation has dropped to 2.4%, close to the 2% target and the economy is barely growing. ECB members, including those with more hawkish views, have been hinting at a June rate cut. The ECB statement echoed this view, saying if its confidence increases that inflation is moving towards the target “in a sustained manner”, then a rate cut would be appropriate.

At her press conference, ECB President Lagarde noted that several members had voted in favor of a rate cut on Thursday. Lagarde added that the ECB could make a cut even if inflation remained above 2%, if the ECB was confident that inflation was moving in the right direction.

It’s a very different story in the US, where the Federal Reserve is dealing with a surprisingly strong US economy. March nonfarm payrolls crushed expectations and US inflation climbed to 3.5%, up from 3.2% and above the forecast of 3.4%. Fed members are sounding hawkish and the markets have slashed rate cut expectations.

After the hot US inflation report, Boston Fed President Collins said that the Fed may need to cut rates less than previously expected and Atlanta Fed President Williams said there was “no clear need to adjust policy in the very near term”. The markets have lowered the odds of a June cut to just 24%, compared to 54% a week ago. A September cut was priced in at 91% a week ago but that has dropped to 72%, according to the CME FedWatch tool.

EUR/USD technical

• EUR/USD is testing support at 1.0651. Below, there is support at 1.0597.

• 1.0749 and 1.0813 are the next resistance lines.