FX Analysis – EUR Rate divergence rhetoric fading?

With an ECB June cut looking likely, FX traders will start looking at the policy path beyond June. Most analysists are calling that the European Central Bank will not cut rates at consecutive meetings and deliver only 75bp of total easing in 2024 based on current data and recent comments from ECB members, the latest being Governing Council member Madis Muller who seemed to stress exactly that point this week.

EURUSD has been trading lately It appears that the divergence narrative – triggered by US data and the ECB in-meeting communication – has started to fade slightly, With EURUSD bouncing nicely off support at 1.06 over the last week. Improvements in the eurozone economic outlook probably playing a role in making the hawks reluctant to give in to a dovish policy path. A June cut is still the base case, but the accompanying message may fail to push rates much lower. That potentially limits how far EURUSD can fall on higher USD rates.

Today, the ECB publishes the CPI expectation surveys for March. In February, the 1-year gauge came in at 3.1% and the 3-year at 2.4%. Expectations are probably for a nudge lower in both surveys. Still, the dollar story should drive most EURUSD moves today: we see risks skewed to a higher dollar and do not see the pair being able to trade sustainably at 1.0700+.