EUR/USD recovery stalls as ECB remains confident over June rate cut

• EUR/USD consolidates around 1.0770 after correcting from 1.0800 as investors expect the ECB to reduce interest rates from June.
• ECB Stournaras’s projection of three rate cuts this year is aligned with market expectations.
• The speculation for the Fed lowering interest rates from September has strengthened.

EUR/USD is slightly down by 0.10% at 1.0760 in Tuesday’s European session. The shared currency pair is broadly sideways around 1.0770 amid indecisiveness among investors due to the absence of high-tier data in the United States (US) and the Eurozone. 

The upside in the major currency pair stalled near 1.0800 as the US Dollar (USD) steadied after investors priced in weak US Nonfarm Payrolls (NFP) and ISM Services Purchasing Managers Index (PMI) data for April, which strengthened speculation for the Federal Reserve (Fed) reducing interest rates from the September meeting. The CME FedWatch tool shows that traders see a 67% chance for rates being lower than current levels in September, which has increased significantly from the 46% chance recorded a week ago.

Despite declining confidence in the US economic outlook, Fed policymakers support keeping interest rates restrictive for a longer period due to the stubborn inflation outlook. On Monday, Richmond Fed Bank President Thomas Barkin said that risks to inflation are still on the upside, and demand must be hit to finish the battle against inflation.

Recently, the Institute for Supply Management (ISM) reported significantly higher Price Paid Indexes for both Manufacturing and Services PMI. This suggests that businesses' prices paid for inputs rose significantly, which exhibits a stubborn outlook on price pressures.

Daily digest market movers: EUR/USD turns sideways after correcting from 1.0800

• EUR/USD is stuck in a tight range around 1.0770 amid the absence of tier-1 Eurozone economic data this week. Investors are expected to predict the next move in the Euro based on speculation about the European Central Bank’s (ECB) interest rate outlook. 
• Financial markets anticipate that the ECB will extend its rate-cut campaign, which is expected to start at the June meeting. ECB policymakers have projected three rate cuts this year, which are aligned with market expectations. 
• ECB policymaker and Bank of Greece Governor Yannis Stournaras said in an interview with a Greek media outlet that he sees three rate cuts this year. He sees a rate cut in July too as possible and added that the Eurozone’s economic rebound in the first quarter of the year made three cuts more likely than four.
• ECB’s confidence in beginning to reduce interest rates from June has been deepened due to consistently easing price pressures. Eurozone’s core Consumer Price Index (CPI), which is the ECB’s preferred inflation measure, has been declining consistently since July 2023. The annual core CPI has come down to 2.7% in April, suggesting that inflation is on course to return to the desired rate of 2%.
• Also, a sharp decline in Eurozone service inflation has also boosted the confidence of the ECB for cutting interest rates from the June meeting. The annual Eurozone service inflation softened to 3.7% in April after remaining steady at 4% for five months. About that, ECB policymaker Philip Lane said that April inflation data finally showed progress on services prices. However, he warned that the ECB would continue to focus on services to make sure it did not derail disinflation later on.
• Meanwhile, Eurostat reported strong Retail Sales data for March. Monthly Retail Sales rose strongly by 0.8% from the estimates of 0.6% after contracting by 0.3% in February. Annually, Retail Sales increased by 0.7% after declining 0.5% (revised from -0.7%) in February.

Technical Analysis: EUR/USD consolidates around 1.0770

EUR/USD trades in a narrow range around 1.0770. The major currency pair struggles for a direction amid an absence of top-tier economic events. The overall trend in the major is also sideways due to a Symmetrical Triangle formation on a daily timeframe. 

EUR/USD exhibits a sharp volatility contraction due to a Symmetrical Triangle formation on a daily timeframe. The upward-sloping border of the triangle pattern is plotted from October 3 low at 1.0448 and the downward-sloping border is placed from December 28 high around 1.1140.

The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, suggesting indecisiveness among market participants.

The asset trades above the 20-day Exponential Moving Average (EMA) near 1.0723, suggesting that the near-term outlook is bullish.