The US central bank raised the US interest rate and as expected investors abandoned the US dollar. As a result, the EUR/USD bulls moved to the resistance level of 1.1091, which increased the strength of the general bullish trend for the currency pair. The gains of the euro/dollar currency pair are on a new important date today, when the European Central Bank will announce an update of its monetary policy, amid expectations of a new interest rate hike to contain record inflation in the bloc countries.
What to expect for the EUR/USD pair:
It is clear that EUR/USD will be in focus this week with the interest rate decisions of both the US Federal Reserve and the European Central Bank ahead of the release of the US Nonfarm Payrolls report on Friday. Overall, flat inflation in the Eurozone means that there are higher risks of a hawkish surprise, which could lead to an upward breakout above the 1.10 resistance of the EUR/USD.
For now, the battle continues around the 1.10 psychological resistance on EUR/USD, with prices falling below this handle at the start of this week on the back of a strong IMP PMI report and a surprising 2.4% drop in German Retail Sales. However, the Eurozone CPI rose to 7.0% in April from 6.9% previously, while core CPI fell slightly to 5.6% from 5.7% in the previous month.
Both metrics were in line with estimates, though.
With major risk events ahead, it appears that speculators are unwilling to commit in either direction as there remains some uncertainty as to how much tightening we will get from the two central banks. Obviously, both bulls and bears will want to hear it straight from the horses' mouths before committing to the long or short side. The European Central Bank's benchmark interest rate has reached its highest level since 2008, at 3.5%. ECB members continued to make hawkish noise ahead of the May policy meeting, although the lack of forward guidance in March means it remains uncertain how much tightening we will get this time around.
After two consecutive increases of 75 bps, the ECB has fallen to 50 bps over the past three meetings and we could see it drop to 25 bps this time around. The market is pricing in two more rate hikes from the ECB this cycle. But there appears to have been only a limited impact from the banking turmoil, while the eurozone economy has avoided a severe recession.
Given that inflation remains flat and above target, this increases the likelihood that we will get a hawkish surprise from the ECB on Thursday, especially if the Fed meeting the day before was not too dovish. This could either be in the form of a 50 basis point hike or a 25 basis point hike plus some hawkish comments around it - for example, hints of several more rate hikes.
The ECB could highlight the risks of a sharper or longer-lasting economic slowdown, a risk that would put any further price increases in doubt or "data dependent" at best. This may lead to the EUR/USD pair selling profit-taking operations.
The other side of the equation of course is the US dollar, which will be in the spotlight with the Fed rate decision and again on Friday with the release of the US Nonfarm Payrolls report. While concerns about weak US data and midrange banks fade away into the background, the odds continue to favor a Fed hike of another 25 basis points to 5.25%, which would mean market rates will be the final interest rate. However, comments from Fed officials remained hawkish in the commentary break.
Look for clues to decipher whether it's a hawkish rally (+25bp with more to follow), or a bearish rally. If this were the latter case, any dovish surprises from the ECB would have a less negative impact on EUR/USD than they would otherwise. Ahead of the European Central Bank and the US Federal Reserve's interest rate decisions, the EUR/USD continues to rally within a narrow range, around 1.1000.
For now, the uptrend remains intact, although there is no momentum. However, support is provided on dips. So far, the area between 1.0900 and 1.0950 has been holding on several occasions. This is also where the 21-day exponential moving average comes into play. As long as rates remain above this area, the bulls will be happy. Otherwise, the bullish momentum will fade further, discouraging the bulls.
Technical analysis of the EUR/USD pair:
- On the daily chart, it appears that the EUR/USD is trading within a bullish channel formation.
- This indicates a significant long-term bullish bias in market sentiment.
- Therefore, the bulls will look forward to riding the current rally towards the 1.1099 resistance or higher to the 1.1190 resistance.
- On the other hand, the bears will target long-term profits at around 1.0911 or below at the support at 1.0824.
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