02.06.202309:45 Forex Analysis & Reviews: USD loses ground as EUR regains strength. Fed rate hike in question

The US dollar has dropped sharply on dovish comments made by Federal Reserve officials and disappointing macroeconomic data from the United States. Against this backdrop, the European currency has gained momentum and is confidently picking up speed. Nevertheless, analysts expect the greenback to recover in the near future and anticipate stability for the euro.

On Thursday evening, June 1st, the US dollar significantly dipped against other currencies, primarily against the euro. The downtrend continued into Friday, June 2. The greenback declined after expectations of another rate hike by the Fed were not met. At the moment, market participants see the likelihood of a 25-basis-point increase at just 24%. This issue is set to be addressed at the upcoming FOMC meeting scheduled for June 14. Meanwhile, some analysts expect a rate hike by the end of July.

Expectations for the more interest rate hikes, as well as the USD dynamics, were impacted by comments from Patrick Harker, the head of the Philadelphia Federal Reserve. According to the official, the regulator should pause the interest rate hiking cycle. These statements have shaken the dollar's position, which had previously been bolstered by concerns about the US debt ceiling. Now, this issue has been resolved. The US Senate passed a bill to suspend the current debt ceiling ($31.4 trillion), effectively eliminating the possibility of a default and boosting risk appetite in the market. In the current situation, pressure on the greenback has increased as it lost additional support.

Another negative factor for the US currency was disappointing statistics from the US. Some weakness in business activity data in the US manufacturing sector has also become a key argument for a pause in the Fed rate hiking cycle. According to current reports, a drop in the ISM Manufacturing PMI to 46.9 points was recorded in May. This indicates a significant decrease in manufacturing activity in the US, experts stress.

In addition, mixed employment data reflect growth in private hiring in America, while the number of initial jobless claims shows tension in the labor market. After the release of the ISM report, the EUR/USD pair made a sharp rise to the 1.0750 level. Meanwhile, mixed employment data in the US provided substantial support to the pair. According to the ADP report, private sector hiring increased by 278,000 in the past month, exceeding the forecast of 170,000.

Market attention is now focused on the upcoming US labor market report to be published on Friday, June 2. Preliminary estimates suggest that the US economy created 195,000 new jobs (excluding agriculture) in May. In April, the reading was 253,000. At the same time, the unemployment rate in the country may increase to 3.5% from the previous reading of 3.4%. As for wage growth rates, they are expected to slow down.

In the current situation, a bearish trend dominates the EUR/USD market, but with a neutral bias. According to the technical chart, the pair is constrained by dynamic resistance levels such as the 100-day Exponential Moving Average (EMA), which is close to 1.0772. The next level is the psychologically important mark of 1.0800. On Friday morning, June 2, the EUR/USD pair was trading around 1.0776, attempting to climb higher.

Taking advantage of the current decline in the greenback, the euro has confidently risen following positive data on the eurozone economy. The European currency strengthened after Eurostat's preliminary estimate reported a slowdown in inflation to 6.1% in May, down from 7% in April. However, this was below economists' forecast of 6.3%. At the same time, the core inflation rate in the EU, which is considered a more important indicator, decreased to 5.3% from the previous 5.6%. It is worth noting that analysts expected a decrease to 5.5%.

A slight decrease in inflation in the eurozone is unlikely to prompt the European Central Bank (ECB) to end its cycle of monetary policy tightening. Currency strategists at Nomura hold a similar position: "At the moment, core inflation in the EU has only decreased by 0.4% from its peak to a level of 5.3%. Therefore, the European regulator is still far from completing the tightening cycle." Christine Lagarde, President of the ECB, previously made hawkish statements, emphasizing that there is currently no clear evidence that core inflation in the eurozone has reached its peak.

In the coming months, the European regulator intends to closely monitor core inflation and service prices in the EU, particularly their monthly dynamics. These measures are necessary to determine the future direction of monetary policy and to assess whether it is appropriate to pause rate increases in such a situation.

According to economists at Nomura, the ECB is likely to raise its key rate by 25 basis points at each of the next two meetings in June and July. This is necessary to bring the policy rate to 3.75%. The central bank will only be able to start winding down the tightening cycle if core prices in the EU slow down sufficiently. The regulator believes that the first rate cut by the ECB will occur much later than markets expect, specifically by the end of 2024.

According to analysts, the decrease in core inflation in Europe will be a positive factor for the euro. However, the dollar is unlikely to stay on the losing streak in the long term as its current decline is temporary. So, there is a possibility of the EUR/USD pair rising to 1.1500 by the end of the year.