08.04.202421:10 Forex Analysis & Reviews: The dollar has laid out its trump cards, it's now the euro's turn

Tug of war. This is what the doves and hawks of the ECB are engaged in. This is what EUR/USD is involved in. On the side of the U.S. dollar are fewer expected rate cuts to the federal funds rate in 2024 than investors anticipate, a stronger U.S. economy, and the risks of Donald Trump's return to the White House. On the euro side, there's global economic recovery and high risk appetite. As a result, the main currency pair is squeezed in the range of 1.05–1.10, and it's difficult to say whether it will break out of it in the near future.

After strong U.S. employment statistics for March, the EUR/USD bulls were supposed to throw in the towel. The futures market lowered the chances of a federal funds rate cut in June to less than 50%. Derivatives estimate the scale of the Fed's monetary expansion at 60 basis points. In other words, borrowing costs should fall at two FOMC meetings in 2024. There's a slight chance they'll drop at a third meeting.

Dynamics of Market Expectations for Federal Funds Rate

This is a serious contrast to the beginning of the year when the Fed was expected to have 6-7 acts of monetary expansion starting in March. Bloomberg experts forecasted that the U.S. economy would expand by approximately 1%, and inflation would slow to 2.6%. Now, GDP is expected to be 2.2%, and PCE is expected to be 2.9%. With a strong economy and high prices, the Fed has no reason to ease monetary policy. Surprisingly, it continues to insist on this.

The dovish rhetoric of Jerome Powell and other FOMC officials leads to an increase in U.S. stock indices and weakens financial conditions. As a result, the Fed's struggle with high inflation is becoming more difficult. But it goes on! Both supporters of monetary expansion and their opponents are eagerly awaiting CPI data. It's no wonder that EUR/USD hasn't made any clear moves up or down and instead has fallen into consolidation.

In Europe, there are other problems. The question of when, apparently, is no longer relevant. Most members of the Governing Council insist on a deposit rate cut in June. The puzzle arises from how much the ECB will ease monetary policy. If the scale of monetary expansion turns out to be larger than that of the Fed, EUR/USD risks going downward.

Inflation Dynamics and Forecasts in the Eurozone

The doves urge the European Central Bank to take active action. In their opinion, it's better to lower the deposit rate sooner rather than later. If it remains at the 4% mark for a long time, the currency bloc's economy will not withstand and fall apart. On the contrary, the hawks advise against rushing. The Governing Council meeting on April 11 promises to be hot, but first, the main currency pair must pass the test with U.S. inflation data for March.

Technically, on the daily chart, EUR/USD is trading in a narrow range. The bulls are trying to play out a pin bar on the breakout of resistance at 1.0845. If successful, the pair will have the opportunity to move towards 1.0875 and higher. If not, there will be an opportunity to return to selling.