EUR/USD forecast: carry trade emerges ahead of ECB rate cut

The EUR/USD exchange rate will be in the spotlight this week as the European Central Bank (ECB) delivers its interest rate decision and as the US publishes its nonfarm payrolls (NFP) data on Friday. It was trading at 1.1371 on Monday, 1.6% below the highest point this year.

ECB decision and US NFP data ahead

The EUR/USD exchange rate is slowly becoming a carry trade opportunity among investors as the spread between the US and European interest rates widens.

Federal Reserve minutes released last week showed that officials are not in a hurry to cut interest rates. Most officials believe that patience is key to observing the impact of tariffs on US inflation. 

Polymarket traders now believe that the first interest rate cut will come in September, followed by another one in December. 

The ECB has taken a different approach as it has become one of the most dovish central banks in the developed world.

It has slashed interest rates seven times, and analysts anticipate that it will deliver another 0.25% cut this week, bringing the official cash rate to 2%. Many other analysts believe that the bank will deliver another 0.25% cut later this year, bringing rates effectively to 1.75%.

The ECB is cutting interest rates because the European economy is slowing due to Donald Trump’s tariffs. At the same time, analysts believe that European inflation has moved to the 2% target.

The average consensus is that the headline Consumer Price Index (CPI) moved from 2.2% in April to 2% in May. Core inflation, which excludes the volatile food and energy items, is expected to move from 2.7% to 2.5%. 

EUR to USD as a carry trade opportunity

The implication of all this is that the EUR/USD pair has slowly evolved into a carry trade opportunity. A carry trade is a situation where investors borrow money from a low-interest-rate country and invest in a high-interest-rate country. 

In this case, European interest rates are expected to fall to 1.75%, while the US ones remain at 4.50%, giving it a spread of 2.75%. Therefore, this carry trade scenario may help to boost the struggling US dollar. 

The EUR/USD exchange rate will also react to the upcoming US nonfarm payrolls (NFP) data on Friday.

Economists expect the data to show that the economy created over 130k jobs in May, down from 177k a month earlier. The unemployment rate remained at 4.2%, while the participation rate and wages are expected to remain intact. 

EUR/USD technical analysis

The daily chart shows that the EUR/USD pair has been in a strong uptrend in the past few months. This happened after the pair bottomed at 1.01820 in January as the US dollar index surged. 

The pair has moved above the important resistance level at 1.1205, the highest swing in September last year and the upper side of the cup-and-handle pattern. A C&H is one of the most bullish patterns in technical analysis.

This cup has a depth of 9.15%. Measuring that distance from the cup’s upper side brings the EUR/USD forecast to 1.2220. For this to happen, it will need to move above the important resistance level at 1.1564, the highest point this year. Doing that will invalidate the double-top pattern whose neckline is at 1.1065.