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The euro has stabilized on Monday after sustaining sharp losses on Friday. In the European session, EUR/USD is trading at 1.0656, up 0.14%. The US dollar posted strong gains last week against the majors and surged 1.8% against the euro, which fell to a six-month low.

Eurozone industrial production rebounded 0.8% m/m in February following a 3% decline in January and matching market expectations. This could point to a turnaround in industrial production, which has been struggling. On an annualized basis, industrial production fell by 6.4%.

ECB’s Simkus projects three rate cuts

The ECB held the cash rate at 4.5% last week for a fifth straight time. The central bank has maintained a cautious stance of “higher for longer” but signaled at the March meeting that a June cut was on the table. On Monday, ECB Governing Council member Gediminas Simkus projected a higher than 50% chance of three more cuts this year. This is close to market expectations as the markets have priced in 85 basis points in cuts this year.

In the US, inflation has accelerated for two straight months, a reminder that the Fed will not have an easy time getting inflation back down to the 2% target. On Friday, UoM 1-year inflation expectations rose to 3.1% in April, up from 2.9% in March and the highest in four months. The economy remains surprisingly strong and last month’s nonfarm payrolls surged with a gain of 303,000, well above expectations.

The markets have responded to the strong data by paring expectations of a rate cut. A July hike is a 50/50 toss-up and a September cut, which just a week ago was an 89% probability, has dropped to 70%, according to the CME FedWatch tool.

EUR/USD Technical

  • EUR/USD tested resistance at 1.0665 earlier. The next resistance line is 1.0708
  • 1.0599 and 1.0556 are providing support


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