EUR/USD remains below 1.0900 ahead of the ECB’s policy decision.

• EUR/USD is trading below 1.0900 ahead of the ECB’s monetary policy announcement.
• The ECB is expected to announce its first 25bps rate cut in five years.
• US NFP will have a significant impact on market speculation about a September Fed rate cut.

EUR/USD rose in the European session on Thursday but remains largely flat below round resistance at 1.0900. Major currency pairs are expected to remain quiet ahead of the European Central Bank’s (ECB) monetary policy decision due to be announced at 12:15 PM (GMT).

Although ECB policymakers have already signaled their intention to cut deposit rates by 25 basis points to 3.75%, the monetary policy decision is expected to change the economic outlook for the euro zone and what the euro will do next. But they have been reluctant to lay out a specific policy path beyond June because the fight against inflation is not yet won.

The final mile for the price index back to the central bank’s desired rate of 2% appears to be tighter than expected due to stubbornly high services inflation, which is largely influenced by wage growth, and the improving euro zone economic outlook. Service inflation in May hit 4.1%, the highest in seven months. Gross domestic product (GDP) grew at a higher rate of 0.3% in 2023, after consecutive declines in the last two quarters.

Regarding the interest rate outlook, ECB officials are not expected to commit to a subsequent rate cut move in July or at any other meeting and will rely on data. Financial markets currently expect the ECB to cut interest rates twice more this year.

Daily Digest Market movers: EUR/USD remains firm and the USD index holds important support at 104.00.

• EUR/USD remains trading sideways below 1.0900. Major currency pairs are torn between uncertainty ahead of the ECB’s interest rate decision and a weaker US dollar (USD). The US Dollar Index (DXY), which tracks the dollar’s strength against a basket of six major currencies, is pulling back as it attempts to extend its recovery above the key resistance level of 104.40.
• The USD index fell to 104.00 as labor market softening offset the strength of the Institute for Supply Management’s (ISM) May Services Purchasing Managers’ Index (PMI) report.
• The ISM Services PMI, which measures activity in the services sector, which accounts for two-thirds of the economy, expanded in May, jumping to 53.8 from the previous estimate of 50.8 and the previous reading of 49.4. During the same period, the new orders index, which reflects forward demand, soared from 52.2 in the previous month to 54.1.
• Meanwhile, U.S. labor market conditions appear to have begun to normalize under pressure from the U.S. Federal Reserve’s (Fed) regulatory policy framework that has lasted for more than two years. U.S. JOLTS’ April job posting data and ADP’s May employment change data were below expectations and previous figures.
• The easing of the labor market has also raised market expectations that the Federal Reserve will cut interest rates starting in September. The CME FedWatch tool shows a 68% chance that rates will fall below current levels in September. The probability has improved significantly compared to the 50% recorded a week ago.
• Looking ahead, investors will focus on May US non-farm payrolls (NFP) data due to be released on Friday. The NFP report is expected to show employers hired 185K new employees, up from 175K in the previous announcement.

Technical Analysis: EUR/USD is trading close to the H&S neckline around 1.0885.

EUR/USD is stuck in a narrow range below 1.0900. The major currency pair forms an inverse head and shoulders (H&S) pattern on the daily time frame, which results in a bullish reversal after breaking the neckline marked at the April 9 high at 1.0885.

The near-term outlook remains firm as a golden cross is formed with the 50-day and 200-day exponential moving averages (EMA) crossing bullishly near 1.0800.

On the 14th, the relative strength index (RSI) fell to the 40.00 to 60.00 range, suggesting that the upward momentum has weakened for the time being.

If the major currency pairs clearly break through the round resistance of 1.0900, the upside is expected to expand to around 1.0950, the high point on March 21, and to the psychological resistance of 1.1000. However, a decline below the 200-day EMA of 1.0800 could enter a bearish trajectory.