EUR/USD breaks through a key support zone as the greenback keeps running on hawkish Fed
FUNDAMENTAL
OVERVIEW
USD:
The US dollar continues to be supported following the hawkish Fed dot plot
last week as the central bank’s tightening bias led to a hawkish repricing in
interest rate expectations.
As a reminder, the Fed delivered a hawkish surprise by projecting a rate
hike this year (the consensus was for no cuts or hikes). The market increased
rate hike bets with now 38 bps of tightening priced in by year-end. There’s a 32%
chance of a hike already in July and 68% probability of a move in September.
The economic data and financial markets will now guide the Fed as Warsh
stated that “financial markets perform best when they react to incoming data
and are less efficient when they have to ask how the Federal Reserve will react
to the incoming data”. He added that “financial markets are the most important
source of information to guide the central bank”.
Trump also posted on Truth Social and, unlike his usual stance under Fed
Chair Powell, did not object to the Fed’s decision. In fact, he said that “rate
hikes could happen,” which sounds like a green light for Warsh and the Fed to
do whatever they deem necessary.
The signal is that the Fed is finally looking to deliver on its price
stability mandate and bring inflation back to the 2% target that it’s been
missing since 2021. If the data says they need to hike, they will. This
should keep supporting the greenback until the next set of economic data.
EUR:
On the EUR side, the ECB is
maintaining the tightening bias, but all the rate hikes have been already priced
in a long time ago. The central bank is now taking a pause at least until
September to see how the economic data evolves over the summer. The market is
pricing in 28 bps of tightening by year-end with the next hike coming in
September at the earliest.
The Eurozone Flash PMIs
yesterday showed unsurprisingly the rate of inflation easing to the slowest pace
since February, just before the US-Iran conflict began. While economic activity
remains subdued, the downward pressure eased and we might see more improvement
in the next months. If the ECB continues to hike, that could weigh on the
economy further.
EURUSD TECHNICAL
ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can
see that EURUSD broke below a key support
zone around the 1.14 handle opening the door for a drop towards the 1.10 handle
next. If we get some soft US data in the next weeks, we can expect a pullback
into the downward trendline. If the price gets there, we can expect the sellers
to lean on the trendline with a defined risk above it to keep targeting new
lows. The buyers, on the other hand, will look for a break to extend the rally
into the 1.18 handle next.
EURUSD TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, there’s
not much we can glean from this timeframe, so we need to zoom in to see some
more details.
EURUSD TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we have a minor downward trendline defining the
bearish momentum. If we get a pullback, we can expect the sellers to lean on
the trendline with a defined risk above it to keep pushing into new lows. The
buyers, on the other hand, will look for a break to extend the pullback into
the 1.1520 level next. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Tomorrow, we get the US
Jobless Claims data and the US PCE report. On Friday, we conclude the week with
the final University of Michigan consumer sentiment survey.
This article was written by Giuseppe Dellamotta at investinglive.com.