Summary:

Despite the ECB's hawkish stance, EUR/USD is bearish due to potential delays in policy easing, political uncertainties (Trump presidency, French election), and rising Eurozone borrowing costs. The Fed kept rates unchanged in June, raised its inflation outlook, and signaled only one rate cut in 2024. Chair Powell stressed the need for more evidence of inflation deceleration, which could boost the USD as rate cut expectations adjust.

EUR/USD 4H

Macro View:

EUR: Despite the European Central Bank's (ECB) hawkish stance, the EUR/USD continues to face bearish sentiment for several reasons. Recent inflation and growth surprises could delay monetary policy easing in both the US and the Eurozone, maintaining the policy divergence between the Federal Reserve and the ECB, which negatively impacts EUR/USD. Furthermore, the FX markets have not yet fully priced in the potential negative impact of a Donald Trump presidency on global trade, which could particularly affect the Eurozone's growth outlook. Additionally, the upcoming French general election adds another layer of political uncertainty, potentially clouding the Eurozone's growth outlook. This is especially concerning if the recent increase in government borrowing costs, widening of European Government Bond (EGB) peripheral spreads, and tightening of European financial conditions persist in the coming months. These developments could reduce the attractiveness of EUR-denominated assets and stall the recent improvement in the Eurozone’s net exports. Consequently, this may halt or even reverse the recent net portfolio inflows into the Eurozone and EUR-buying by corporates. Both Credit Agricole and HSBC maintain their below-consensus forecasts for EUR/USD, expecting the pair to slide to 1.0500 and 1.0550, respectively, by the end of 2024.

USD: In June, the Federal Reserve kept interest rates unchanged but raised its inflation outlook while maintaining its growth outlook. Consequently, the Fed revised its rate outlook, with the updated dot plot indicating only one rate cut in 2024, a more hawkish stance compared to the May meeting. Chair Powell emphasized that the Federal Open Market Committee (FOMC) is not yet ready to cut rates, despite welcoming the softer-than-expected CPI data for May. He stressed that the Fed is data-dependent and wants more evidence of inflation deceleration before easing policy. Since US rate market expectations have not fully aligned with the updated Fed dot plot, the USD could benefit as rate cut expectations are adjusted further.

FX View:

DXM: A Tool to Gauge Retail Sentiments

EUR/USD Current Retail Long/Short Position

The DXM shows that 47% of traders are bullish, while the remaining 53% are bearish, reflecting the predominant retail sentiment. This sentiment offers a contrasting trading opportunity since retail traders tend to consistently lose money in the long term.

Seasonality Analysis: The Historical Movement of the Currencies  

EUR Futures’ seasonality movement

The seasonal pattern for the EUR suggests bearish momentum in the near term.

USD Futures’ seasonality movement

The seasonal pattern for the USD suggests bullish momentum in the near term.

Sources: Prime Market Terminal

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