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There is nothing better than glimmers of hope. The rise in business activity in the eurozone to an 8-month high due to the exit of the service sector from a six-month decline has become a real ray of light through the clouds for EUR/USD enthusiasts. For the first time in the last three weeks, the main currency pair soared above the 1.088 mark so quickly that the bulls were literally breathless.
If in January–February, the U.S. dollar strengthened against the euro due to a reassessment of market views on the fate of the federal funds rate, expectations that the Fed would outpace the ECB on the road to monetary expansion and American exceptionalism, now these trump cards for EUR/USD bears are in the past. The markets have sided with the Federal Reserve, now expecting a 75 bps cut in the federal funds rate starting in June. After the European PMI data, investors' views on the ECB's policy have also changed.
Statistics showed a recovery in the service sector, compensating for the ongoing weakness in German industry. Germany is not only the sickest man in Europe but also the main brake on the currency bloc. However, the understanding that things are improving for the other members became a catalyst for the EUR/USD rally.
Dynamics of European business activity
The futures market no longer expects a deposit rate cut by the ECB by more than 100 bps for the first time since early December. It reduced the chances of starting monetary policy easing in April to 30%. Investors now count on the beginning of monetary expansion in June, the same month as the Fed. No central bank has an advantage in speed, and the divergence in economic growth between the U.S. and the eurozone is narrowing. Why not buy EUR/USD?
Risks undoubtedly remain. In a hot U.S. economy, inflation may accelerate again, forcing the Federal Reserve to keep rates higher for longer than currently anticipated. Or consumer prices in the eurozone may reach the 2% target in the coming months, prompting the ECB to pull the trigger on monetary expansion. In the first case, EUR/USD quotes will fall, and in the second – rise.
Dynamics of market expectations on the scale of ECB monetary expansion
If the U.S. economy shows signs of slowing down and the eurozone continues to demonstrate more and more signals of recovery, the main currency pair will continue its upward campaign. Ultimately, if monetary policy in both Washington and Frankfurt depends on data, and the data requires buying EUR/USD, why not do it?
Technically, on the daily chart, the main currency pair realized the previously set target for longs at 1.088, followed by a predictable pullback. Euro buyers showed weakness, unable to storm the upper bound of fair value. However, as long as EUR/USD quotes are above 1.077, the sentiment remains bullish, and pullbacks make sense for forming long positions.
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