- Data on Tuesday revealed a big jump in the Eurozone’s services sector.
- ECB’s Luis de Guindos confirmed the June rate cut.
- Any policy divergence between the Fed and the ECB could weaken the euro.
The EUR/USD price analysis leans bullish as the euro gains ground on upbeat PMI data. Despite this positive momentum, investor focus remains on the probability of the European Central Bank implementing its first rate cut in June.
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Data on Tuesday revealed a big jump in the Eurozone’s services sector, which made up for a decline in manufacturing activity. Therefore, the composite PMI jumped, indicating a return to growth in the Euro area. Despite the recovery in the economy, markets still expect the ECB to start implementing rate cuts ahead of the Fed in June.
Notably, ECB Vice President Luis de Guindos confirmed on Tuesday that the ECB will lower rates in June. However, he also said the central bank should exercise caution after June and wait for signals from the Federal Reserve. Clearly, policymakers are worried about a possible policy divergence with the Fed. Market participants have significantly pushed back expectations for rate cuts in the US after recent upbeat inflation data.
Moreover, policymakers have shifted their tone from dovish to bullish, saying they might prolong higher interest rates. Therefore, markets expect fewer cuts, which might start in the fourth quarter. This is well after the ECB’s June cut. Any divergence with the Fed could cause a significant decline in the euro, which might undo some of the ECB’s work. A weaker euro would increase import costs and drive inflation. As such, the ECB will likely be patient after the first cut to see what the Fed will do.
EUR/USD key events today
- US flash manufacturing PMI
- US flash services PMI
EUR/USD technical price analysis: Weaker push above 30-SMA
On the technical side, the EUR/USD price has started trading above the 30-SMA, showing bulls have taken over. This comes after a pause at the 1.618 Fib extension level and a bullish divergence in the RSI.
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However, the new move is weak because the price is sticking close to the SMA. At the same time, it is making small-bodied candles, showing weak momentum. If bulls find their footing above the SMA, they will retest the 1.0725 key level. Otherwise, the downtrend will continue below 1.0600.
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Saqib Iqbal
