Central Bankers Delay the Rate Cutting Cycle

Euro (EUR/USD, EUR/GBP, EUR/JPY) Weekly Forecast: Bearish

• ECB minutes confirmed that central bankers are in no rush to cut interest rates
• EUR/USD reveals short-term resistance amid longer-term advance
• EUR/GBP back at key support zone, providing the next big test
• EUR/JPY bull run showing signs of fatigue ahead of crucial Japanese CPI print
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Central Bankers in No Rush to Cut Rates

The theme among global central bankers this week centered around delaying the start date of interest rate cuts. The slightly hawkish FOMC minutes kicked things off this week followed closely by comments from prominent Fed officials in favour of delaying the start date of interest rate cuts.

However, Europe is not in the enviable position the US finds itself in. The world’s largest economy has outperformed growth expectations, maintains a tight labour market, and the consumer appears healthy on the surface at least. Europe, on the other hand, has narrowly avoided a technical recession on multiple occasions, saved by the narrowest of margins as quarterly GDP growth oscillates around zero.

However, markets now price in a similar trajectory of future interest rate cuts for the two very different economies, projecting a little more than three 25 basis point cuts this year with futures markets pricing 85bps for the Fed and 88bps for the ECB in December.

Bundesbank head Joachim Nagel referred to the fact that the ECB will only get key price data in Q2, anchoring expectations of a possible cut around the mid-year mark. Earlier on Friday, The ECB’s Robert Holzmann reiterated that the ECB typically follows on from the Fed when it comes to the timing of rate adjustments, which further tapered rate cut bets. The ECB minutes of the January meeting revealed that the risk of cutting too soon still outweighed the risk cutting interest rates too late and subjecting the economy to unnecessary stress.

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EUR/USD Reveals Short-Term Resistance Amid Longer-Term Advance

The weekly EUR/USD chart shows a notable rejection of the prior weekly low of 1.0724 – a level that has supported prices multiples times in the past. The pair is also on track to post a weekly recovery after bearish price action showed signs of slowing down in the prior two weeks with very thin candle bodies.

EUR/USD Weekly Chart

Source: TradingView, prepared by Richard Snow

It is among this backdrop that daily price action provides an indication that shorter-term bullish momentum may be waning. The Thursday spike high tagged the 50-day simple moving average (SMA) before retreating and Friday provided a modest move, limited by the 200 SMA and the 1.0831 level.

With markets expecting similar rate cut paths for the two economies, the dollar’s superior interest rate differential may help recover recent losses against the euro especially if PCE data beats estimates for January.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

EUR/GBP Back at Key Support Zone, Providing the Next Big Test

EUR/GBP has respected multiple technical levels since the start of this year as momentum and follow through have been lacking. Numerous tests of the zone of support around 0.8515 have resulted in an attempt to head higher but a lack of momentum has subjected the pair to sideways trading.

More recently, the 50 SMA and underside of the prior ascending trendline were enough to repel bulls, sending the pair back towards the support zone. In the event the euro comes under pressure this week, the swing low of 0.8500 may come into focus with a weekly close below that opening up the potential for a more sustained bearish reaction.

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However, most major FX pairs have lacked the ability to trend, meaning continued sideways action is most likely, in the absence of external shocks or massive deviations in high importance data.

EUR/GBP Daily Chart

Source: TradingView, prepared by Richard Snow

EUR/JPY Bull Run Showing Signs of Fatigue Ahead of Crucial Japanese CPI Print

EUR/JPY has been on an impressive run, surpassing the prior zone of resistance (161.70) with relative ease, however, towards the end of the week price action revealed a slowdown in bullish momentum.

Thursday’s swing high pulled back, leaving an extended upper wick in full view. On Friday, the daily candle revealed a doji – suggesting a slowdown in prior momentum. The yen has depreciated against most majors, with most of the focus on USD/JPY and the 150 marker as the finance ministry has reiterated its displeasure with the sharp depreciation of the local currency.

Nevertheless, market participants have not heeded the jawboning of officials and continue to trade the yen around undesirable levels. While the trend remains to the upside, daily candles hint that prices may head lower at the start of next week which would be aided by a hotter than expected inflation print. Inflation in Japan has eased in recent prints, raising doubts about the much-anticipated rate hike from the Bank of Japan.

Hotter inflation may provide the catalyst for a pullback towards 161.70 but should inflation continue to ease, the pair may have eyes ion the prior swing high around 164.82.

EUR/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

Major Risk Events in the Week Ahead

First up, Japanese inflation data could impact the yen even further should inflation follow the recent trend lower – raising doubts around one of the Bank of Japan’s two conditions for policy normalisation. Potentially bullish for EUR/JPY but this is fraught with complexity as the Japanese finance ministry could deploy the use of FX intervention at any time.

German unemployment and inflation data for Feb comes into view after the Bundesbank suggested that Germany may already be in recession.

A second look at US Q4 GDP has the potential to provide intra-day volatility but a major reaction is unlikely in the absence of a massive deviation from the first estimate. Then on Friday US PCE data provides another crucial piece of the inflation puzzle.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX