Euro Outlook Ahead of the ECB Rate Decision – EUR/USD, EUR/CHF Setups

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 bps cut from the ECB will be a massive surprise as multiple committee members have expressed their preference for such a move. The European economy has been in need of a boost for since Q4 2022 when growth began to stagnate. Multiple quarters of zero or near-zero GDP growth and encouraging progress on inflation have allowed the ECB room to consider dropping interest rates for the first time since 2019. Euro zone inflation hit a bit of a snag in April, coming in hotter than expected but the beat is unlikely to threaten the 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 scheduled to determine interest rates but the key piece of information will be whether the ECB provides any clues on future rate cuts and timings. Prior comments from ECB officials suggest that the cutting process is likely to be conducted in a gradual manner, with early indications pointing towards a hold in July to assess the impact of the first cut and analyse incoming data. Markets will be eagerly following the press conference

Market Implied Interest Rate Cuts

Source: Refinitiv, prepared by Richard Snow

Recent euro positioning has improved, with speculative money managers reporting a sharp drop in euro shorts, while longs have appear to be ticking higher again. Such a turnaround in positions may suggest that the euro is due for further upside as the net positioning swings positive once more.

Commitment of Traders Report (CoT) for Euro Positioning with EUR/USD Price Action

Source: CBOE, Refinitiv, prepared by Richard Snow

EUR/USD Benefits from Weaker Dollar – Further Upside in View if US Data Disappoints

The economic surprise index for the US suggests that incoming data is likely to remain on the softer side as restrictive monetary conditions continue and the disinflation process appears to be back on track.

Softer US data has helped EUR/USD head higher, despite the massively anticipated rate cut from the ECB later this week. The medium-term outlook has seen the pair strengthen 2.8% since marking the low in April. However, since the middle of May, the pair has meandered within a gentle, downward sloping channel.

Support emerges at channel support and the 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 Inflation Comments Prop up the Swiss Franc

The departing Chairman of the Swiss National Bank (SNB), Thomas Jordan, communicated his thoughts on upside risks to the inflation outlook, which he sees as coming from a weaker Swiss franc potentially.

His comments naturally inspired the franc to recover lost ground, sending EUR/CHF lower. The SNB was the first among the major central banks to cut interest rates back in March. The decision set in motion a broader depreciation in the franc which appears to have come to an end in the latter stages of May with the appearance of an evening star.

The formation of the evening star marked the recent top in EUR/CHF which appeared before Jordan’s comments. The pair shows a bias towards the downside and recently broke below the 50-day simple moving average (SMA) ahead of channel support which naturally becomes the next level of interest. Additional levels to the downside include 0.9694, followed by the 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