Euro Outlook ahead of ECB rate decision – EUR/USD, EUR/CHF setup

Euro (EUR/USD, EUR/CHF) News and Analysis

Euro positioning, cooler US inflation and rate expectations in focus

At this point, anything other than a 25 basis point cut from the ECB will be a big surprise, as many committee members have expressed their preference for such a move. The European economy needs a recovery from the 4th quarter of 2022, when growth started to stagnate. Several quarters of zero or near-zero GDP growth and encouraging progress on inflation have allowed the ECB to consider cutting interest rates for the first time since 2019. Inflation in the euro zone faltered a bit in April, coming in even hotter than expected, but the pace is unlikely to threaten recent progress in getting prices back to 2%.

Market expectations reveal a 96.7% chance of a 25 basis point cut later this week when the Governing Council is set to set interest rates, but the key information will be whether the ECB provides any guidance on future rate cuts and timing. Previous comments from ECB officials have suggested that the tapering process is likely to be gradual, with early indications suggesting a pause in July to assess the impact of the first cut and analyze incoming data. Markets will be eagerly watching the press conference

A market-implied reduction in interest rates

Source: Refinitiv, processed Richard Snow

Recent euro positions improved, with speculative money managers reporting a sharp drop in euro shorts, while longs appeared to be higher again. Such a reversal in positions may indicate that the euro will see further growth as the net position swings back into positive values.

Commitment of Traders (CoT) report for euro positioning with EUR/American dollar Price action

Source: CBOE, Refinitiv, processed Richard Snow

EUR/USD benefits from weaker dollar – further upside if US data disappoints

The US Economic Surprise Index suggests that incoming data is likely to remain on the softer side as tight monetary conditions continue and the disinflation process appears to be back on track.

Softer US data helped EUR/USD move higher, despite a massive rate cut expected by the ECB later this week. In the medium term, the pair has rallied 2.8% since its April low. Since mid-May, however, the pair has been meandering in a mild, descending channel.

Support appears at the channel support and 200 SMA around 1.0800. Levels to the upside remain at channel resistance, followed by 1.0942/1.0950.

EUR/USD daily chart

Source: TradingView, prepared by Richard Snow

SNB Chairman Jordan’s comment on inflation The Swiss franc will be supported

Outgoing Swiss National Bank (SNB) President Thomas Jordan has given his thoughts on the pro-inflationary risks to the inflation outlook, which he says may come from a weaker Swiss franc.

Naturally, his comments inspired the franc to recover lost ground, sending EUR/CHF lower. The SNB was the first of the major central banks to cut interest rates in March. The decision set in motion a broader depreciation of the franc that appears to have ended in the second phase of May with the emergence of an evening star.

The evening star formation marked a recent high in EUR/CHF that came before Jordan’s comments. The pair is trending downward and recently broke below the 50-day simple moving average (SMA) ahead of channel support, which naturally becomes the next level of interest. Further downside levels include 0.9694 followed by 200 SMA or 0.9565.

EUR/CHF daily chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX