The US dollar has seen a rebound, with the dollar index maintaining levels just above its 200-day moving average around 104.40. This recovery aligns with a rise in US yields since mid-May, reflecting reduced expectations for Fed rate cuts. Currently, the market anticipates only one rate cut later this year, with 13 basis points expected by September and 32 basis points by December. A hawkish message from the Fed is expected at the upcoming FOMC meeting on June 12th, potentially boosting the dollar further.

Additionally, US political dynamics are playing a role. Donald Trump's increased re-election prospects, now at 53% according to PredictIt.com, could strengthen the dollar due to expectations of more trade disruptions and looser fiscal policy.

EUR: Inflation Data and ECB Rate Cut Plans

The EUR/USD pair has dropped below 1.0800, approaching the 200-day moving average support around 1.0790. Despite stronger-than-expected German inflation data for May, which saw a rise to 2.8% in annual harmonized inflation, the euro has not benefited significantly. The broader euro-zone CPI report is expected to show a modest increase, which is seen as temporary.

ECB officials have signaled plans to start cutting rates in June, though the path beyond the first cut is uncertain. Stronger-than-expected wage growth in the euro-zone has led to a reduction in further ECB rate cut expectations for the year, supporting the euro in the near term.

EUR/USD is at a critical technical juncture. The pair is testing support around 1.0790, with potential for further downside if this level is breached ahead of the ECB’s policy meeting on June 6th. Additionally, EUR/GBP is testing support at 0.8500, a level that has held for nearly a year.

Consider shorting EUR/USD at current levels (around 1.0800) with a target of 1.0650, anticipating further euro weakness if key support levels are broken and the ECB maintains its dovish stance. Set a stop-loss above the recent highs at 1.0900 to manage risk.

EUR/USD Trading Idea: Diverging Central Bank Policies and Political Influences

May 31 2024

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