EUR/USD bounces back to 1.0900 as ECB cuts key rates by 25 bps

• EUR/USD recovers to 1.0900 after the ECB cuts key rates by 25 bps.
• The ECB sees annual core inflation at an average of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026.
• The US NFP will significantly influence market speculation for the Fed rate cut in September.

EUR/USD rises in Thursday’s New York session as the European Central Bank (ECB) reduced its key rates by 25 basis points (bps). The Main Refinancing Operations Rate declines to 4.25% and the Deposit Facility Rate is reduced to 3.75%. The policy decision has remained in line with market expectations. The ECB has also released the latest inflation projections, which indicate that the Eurozone's annual core inflation is at an average of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026.

ECB policymakers had already communicated their intention to cut key borrowing rates by 25 bps as they were sure that inflation is oncourse to return to the desired rate of 2%. While officials had already promised a rate cut move, they had been reluctant to suggest a specific policy path beyond June as the battle against inflation has not won yet.

The last mile in the price index returning to the central bank’s desired rate of 2% appears to be stickier than expected due to stubbornly higher service inflation, which is significantly influenced by wage growth, and improved Eurozone’s economic outlook. Service inflation rose to 4.1% in May, the highest in seven months. The Gross Domestic Product (GDP) grew at a higher pace of 0.3% after contracting consecutively for the last two quarters of 2023.

Over the interest rate outlook, ECB officials were not expected to commit to any subsequent rate-cut move in July or any other meeting and will remain data-dependent. Currently, financial markets expect the ECB to deliver two more rate cuts this year.

In the press conference, ECB President Christine Lagarde commented that the central bank needs more data to confirm the disinflationary path and cautioned that price trends could be bumpy in the next few months. 

Daily digest market movers: EUR/USD rebounds but remains broadly sideways

• EUR/USD rises to 1.0900 as the US Dollar (USD) edges down. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades cautiously near crucial support of 104.00 after the United States (US) Department of Labor reported higher-than-expected Initial Jobless Claims for the week ending May 31. Number of individuals claiming jobless benefits for the first time were 229K, higher than estimates of 220K and the prior release of 221K, upwardly revised from 219K.

• The USD Index dropped to 104.00 as the impact of the strong US Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) report for May was offset by easing labor market strength.The ISM Services PMI, which gauges the service sector activity that accounts for two-thirds of the economy, returned to expansion in May and jumped to 53.8 from the estimates of 50.8 and the prior reading of 49.4. In the same period, the New Orders Index, which reflects forward demand, jumped to 54.1 from the former release of 52.2.

• Meanwhile, US labor market conditions appear to have started normalizing amid the pressure from the Federal Reserve’s (Fed) more than two-year-long restrictive policy framework. The US JOLTS Job Openings data for April and ADP Employment Change for May came out below their forecasts and prior readings.Easing labor market strength has also boosted market expectations for the Fed to start reducing interest rates in  September.

• The CME FedWatch tool shows a 68% chance that the interest rate will be lower than the current level in September. The probability has significantly improved from 50% recorded a week ago.Going forward, investors will shift focus to the US Nonfarm Payrolls (NFP) data for May, which will be published on Friday. The NFP report is expected to show that employers hired 185K new employees, higher than the prior release of 175K.

Technical Analysis: EUR/USD needs to decisively break above 1.0900 for fresh upside

EUR/USD is stuck in a tight range below 1.0900. The major currency pair forms an Inverted Head and Shoulder (H&S) pattern on a daily timeframe, which would result in a bullish reversal after breaking the neckline marked from the April 9 high at 1.0885.

The near-term outlook remains firm due to a golden cross formation amid a bullish crossover of 50-day and 200-day Exponential Moving Averages (EMAs) near 1.0800.

The 14-period Relative Strength Index (RSI) has slipped into the 40.00-60.00 range, suggesting that the momentum, which was leaned toward the upside, has faded for now.

If the major currency pair decisively breaks above the round-level resistance of 1.0900, it is expected to extend its upside towards the March 21 high, around 1.0950, and the psychological resistance of 1.1000. However, a downside move below the 200-day EMA at 1.0800 could push it into a bearish trajectory.