The Euro faces headwinds after softer-than-expected Eurozone inflation data for March reignited expectations for a European Central Bank (ECB) rate cut in June. The headline year-on-year inflation rate dropped to 2.4%, below forecasts of 2.6%, with core inflation (excluding volatile food and energy prices) also cooling to 2.9%, undershooting expectations of 3.0%. This strengthens the case for the ECB to ease policy, contrasting with the hawkish Federal Reserve stance in the US.
However, the Euro’s weakness may be limited. Firstly, robust services inflation, a key indicator for wage pressures, remained unchanged at 4.0% year-on-year. This suggests the ECB may be cautious about cutting rates too quickly. Secondly, the Eurozone unemployment rate hit a record low of 6.5% in February, highlighting a robust labour market. This could translate to higher inflation further down the line, potentially delaying the ECB’s easing plans.
Technical Analysis
The EURUSD price action currently hovers around 1.0769, finding support near the 20-SMA (green line). The price trades above the 20-SMA but remains below the 50-SMA (blue line) and the 100-SMA (orange line), indicating a potential short-term trading range.
The downward-sloping Relative Strength Index (RSI) at 45.88 suggests a lack of strong buying momentum. If the price fails to hold above the 20-SMA, short-term trading opportunities might emerge towards the 1.07242 support level. A confirmed break below this level could expose 1.06758 in the near future.
However, a sustained break above the 20-SMA, coupled with significant trading volume, could signal a bullish reversal. This could bring the 1.08048 resistance level into play, with a further break above potentially targeting 1.08638.
Summary
The Euro is under pressure due to dovish ECB expectations, but the downside may be cushioned by robust services inflation and a strong labour market. Technically, a break above the 20-SMA offers a potential short-term bounce to higher levels, while a break below the 1.07242 support could indicate further downside.
Sources: TradingView, Trading Economics, Reuters, EUROSTAT.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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