Synopsis:

Danske Bank analyzes the implications of recent US data on EUR/USD movements, anticipating a near-term continuation of the currency pair's historically narrow trading range due to persistent inflation concerns and the close watch on upcoming US and EU economic indicators.

Key Points:

• US Data Impact: Recent US CPI data provided a slight relief by breaking the trend of consistent inflation surprises, stabilizing EUR/USD movements.
• Continued Range-Bound Trading: Given the increasing correlation between US and EU front-end rates, EUR/USD is expected to remain within a tight range of 1.06-1.09.
• Upcoming Data Releases: Key data such as the US PCE inflation, ISM, and non-farm payrolls will be critical to watch, likely keeping EUR/USD around the 1.08 level until these releases.
• Central Bank Policies: The Fed is anticipated to start rate cuts in September, with the ECB expected to make a 25bp cut in June, followed by two more cuts within the year.
• Market Pricing: Current market pricing aligns closely with Danske’s forecast, showing expectations of more aggressive ECB cuts compared to the Fed.

Conclusion:

Danske Bank forecasts a continuation of the narrow range trading for EUR/USD in the near term, influenced by US data releases and central bank policy decisions. The bank notes potential risks including a possible earlier Fed rate cut and fewer ECB cuts than anticipated, which could introduce some volatility to the currency pair’s movements.