The euro was beaten down after the ECB policy decision yesterday, in which the central bank communicated that they are more or less done with rate hikes already. The question now is, for how long can they stick with their higher for longer narrative? Especially since the euro area economy is running to the ground and recession risks are growing with every passing day.
It will be an extremely difficult task for the ECB to manage a soft landing here and markets are also somewhat of that opinion. The first rate cut is currently priced in roughly in June 2024.
And the central bank dynamics in EUR/USD has shifted to being which of the two economies is going to fare better in the months ahead, the US or Europe? Both the Fed and ECB are in pause mode and it now boils down to who can hold rates higher for longer, as they claim to be.
At this juncture, it seems to be favouring the Fed and by that account, the path of least resistance is for a move lower in EUR/USD.
For now, the May low at 1.0635 is holding but sellers are well in control as the bias in price action continues to keep more bearish as well. It will take buyers a push back above 1.0800 to really get some work done and that is a long way from here, not least now with the ECB no longer being a supportive factor.
A break below 1.0635 will see little support until we get closer to 1.0500 next, with the February and March lows of 1.0516-36 also in play.
