Since the start of this week's trading, the price of the EUR/USD currency pair maintained the gains of the recent bullish rebound, with gains that reached the 1.1275 resistance level, before settling around 1.1220 at the time of writing, prior to announcing the inflation figures for the eurozone. The euro's gains stopped, albeit temporarily, after a prominent member of the European Central Bank's Policy Committee raised doubts about the possibility of raising interest rates in September, which could cast a softer view of the euro's exchange rates. Dutch central bank governor Claes Nott - who sits on the ECB's Governing Council - said it looked as if core inflation in the eurozone had stabilized and he was optimistic that inflation would ease to the 2.0% target in 2024.
So far, the euro has been one of the best-performing currencies over the past week and month, but the likelihood of this outperformance extending over the coming weeks and months will depend on what the ECB does. Markets see a 70% chance of a rate hike in September, so there is quite a bit of re-quoting available, which could weigh on the euro.
The ECB official - who has proven to be one of the more "hawkish" members of the ECB this session - added that the ECB would have to raise interest rates in June, but said a balance must be struck to avoid overtightening. He acknowledges that there is still a lot of data to come and that increases "beyond July" are possible, but not certain.
"For July, I think it's a must, for anything after July it's at most a possibility but by no means a certain," he told Bloomberg Television.
Overall, the fact that a well-known ECB hawk is now moderating expectations for any further 25bp increase is a high point in the current cycle in that it provides a clear indication that a top is now on the horizon.
The recovery of the euro against the dollar and resilience against the pound sterling in 2023 is linked to the rapid increases in interest rates of the European Central Bank, which led to raising the yield on bonds of the euro area. This has prompted eurozone investors to bring home overseas investments where domestic assets provide a greater return, strengthening the euro in the process. It also encouraged international investors to send capital to the eurozone to take advantage of the improvement in prices. But this trade relied on a "hawkish" view of the ECB and any indication that the central bank is changing its stance could threaten these supportive dynamics for the euro, and at least could put a lid on the outperformance.
EUR/USD Technical Outlook
- The price of the euro against the dollar, EUR/USD, may continue to maintain the gains of the current bullish rebound, until the reaction to the announcement of inflation numbers for the eurozone, which will have a bearing on the expectations of raising interest rates for the European Central Bank, factor in the euro's recent gains.
- If the readings are in favor of further tightening, the euro/dollar may move towards stronger ascending levels, the closest to which they are currently 1.1275, 1.1330, and 1.1400, respectively.
- According to the performance on the daily chart below, these areas will be sufficient to push the technical indicators toward strong overbought levels.
On the other hand, over the same period of time, the return of the bears in prices towards the support levels at 1.1080 and 1.1000 threatens the current upward path.
Ready to trade our Forex daily analysis and predictions? Here are the best regulated trading brokers to choose from.