EUR/USD Forecast: Investors Ramp Up Bets on Fed’s Cut

• The data revealed an unexpected decline in US producer prices.

• Current market pricing indicates a 78% probability that the US central bank will initiate rate cuts in March.

• Philip Lane said the ECB could start cutting rates in June.

Monday’s EUR/USD forecast leaned towards optimism, driven by a weakened dollar, as investors raised their expectations for early rate cuts by the Fed. With a potential kick-off in March, the prospects of Fed cuts gained momentum following Friday’s data showing an unexpected drop in US producer prices.

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Chris Weston, Pepperstone’s head of research, commented, “Following the US CPI and PPI releases, the market is increasingly certain about the Fed cuts starting in March. Moreover, markets expect a 25 bps cut at every meeting from that point.”

Meanwhile, current market pricing indicates a 78% probability that the US central bank will initiate rate cuts in March. This is up from 68% a week ago. 

In contrast, the ECB plans to assess crucial data for potential interest rate cuts by June. Still, ECB chief economist Philip Lane cautioned against moving too quickly, as it could be counterproductive. Lane believes there will be a “series of rate cuts.” However, he noted that important wage data would only be fully accessible by the ECB’s meeting on June 6.

Meanwhile, investors speculate that the ECB might reduce borrowing costs this year, starting in March. Money markets currently anticipate at least 150 basis points in cuts, bringing the ECB’s deposit interest rate for banks to 2.5%.

EUR/USD key events today

There won’t be any significant reports in the Eurozone. Meanwhile, the US is observing Martin Luther King Jr. Day, which might lead to thin trading.

EUR/USD technical forecast: Corrective move continues between 1.0900 and 1.1000

On the charts, the EUR/USD price is in a corrective move after pausing its decline at the 1.0900 support level. However, this corrective move has failed to go beyond a strong resistance zone comprising the 1.1000 key level and the 0.5 fib retracement level.

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Moreover, the price is mostly chopping through the 30-SMA, indicating no clear direction. This can also be seen in the RSI, which has failed to respect the pivotal 50 level. After a corrective move, the price will likely make an impulsive leg. Furthermore, given the previous impulsive leg was bearish, EUR/USD might soon break below the 1.0900 support to retest 1.0800.

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