New evidence suggests that the US economy is cooling, yet the Federal Reserve has not made a decision regarding a potential rate cut. Influential voices within the Federal Open Market Committee (FOMC) such as New York Fed President John Williams, Richmond Fed President Thomas Barkin, and Cleveland Fed President Loretta Mester have indicated the need for more time to combat inflation effectively. This cautious stance, coupled with the fastest rise in import prices in two years and favorable unemployment claims data, has exerted downward pressure on the EURUSD exchange rate.
Factors Influencing the US Dollar
The US dollar faced swift penalties when signs of weakness appeared. According to StoneX, several factors could contribute to the decline of the greenback, including an improvement in global risk appetite, a rebound in China's economy, and hawkish signals from the Bank of Japan. However, two of these factors are now under scrutiny. China's retail sales and fixed capital investments have disappointed, and insiders from Bloomberg reveal that hedge funds and asset managers took advantage of April’s Consumer Price Index (CPI) data to buy US dollars, leading to a rally in USDJPY and affecting other currencies.
Market Sentiment and Speculation
The global risk appetite remains robust, as demonstrated by record highs in stock indices. However, market sentiment can sometimes be overly optimistic. For instance, in December 2023, investors called for six monetary expansion measures after the FOMC forecasted only three rate cuts for 2024. Currently, similar speculative behavior is observed. Weak data from the labor market, retail sales, and industrial production have fueled conjecture that the Fed's July meeting might hold surprises, potentially leading to a policy shift. With two more employment and inflation reports due before the meeting, the Fed's decision remains uncertain.
Economic Indicators and Fed Policy
Despite the downbeat data, the US economy is not easily classified as weak. The labor market added 175,000 jobs, unemployment remains low at 3.9%, and benchmark retail sales rose by 3.5%. Consequently, consumer prices remain above the 2% target, possibly stabilizing around 3%. Given this context, the Fed might opt to maintain its current stance, with Nordea forecasting that rate cuts are more likely in December rather than September. This projection could see the EURUSD pair drop to 1.07 by the end of July.
EURUSD Trading Strategy
The pivotal question for the EURUSD pair is whether the US economy continues its cooling trend. A cooling economy would likely lead to falling Treasury yields and increase the chances of the Fed easing monetary policy in July, potentially weakening the US dollar. Conversely, positive macroeconomic data would bolster the greenback.
For traders, the market appears to be in a holding pattern, with investors closing positions that might result in a correction or consolidation of the EURUSD pair. Defining the boundaries of this consolidation will take time. In the interim, a strategy to consider is buying on the rebound from support levels at 1.0835 and 1.08.
Conclusion
Monitoring the ongoing economic data and FOMC communications will be crucial in navigating the EURUSD trading landscape. Investors should stay informed about the economic indicators and Fed's policy decisions, as these will significantly impact currency movements in the coming months.