EUR/USD Preps for Data Heavy Week with ECB & Fed in Focus

EUR/USD ANALYSIS & TALKING POINTS

• ECB rate hike looks to inflation data for guidance as money markets require more conviction between a 0.25% and 0.50% increment.
• USD receives additional support from souring risk sentiment.
• Technical analysis favors euro downside on both weekly and daily timeframes.

EURO FUNDAMENTAL FORECAST: BEARISH

The euro head into the central bank focused week on the backfoot but could change in the buildup to the European Central Bank (ECB) rate decision (see economic calendar below). Key metrics including eurozone core inflation and credit data will give markets valuable input to analyze the state of the region. Thus far core inflation has remained elevated due to wage growth offsetting higher prices and is set to remain high. The issue the ECB now faces is the fact that inflationary pressures have migrated from the supply-side (abating energy prices) to demand factors.

EUR/USD ECONOMIC CALENDAR

Source: DailyFX economic calendar

The question for next week is likely ‘’by how much will the ECB hike rates?’’. According to current money market pricing (refer to table below), there is a 78% probability that the ECB will hike by 25bps. This is probably a wide decision in that the ECB can re-assess economic variables ahead of the June meeting as the current environment is riddled with uncertainty – primarily through increased war activity in Ukraine as well as caution around the recent banking crisis.

ECB INTEREST RATE PROBABILITIES

Source: Refinitiv

From a US perspective, global risk aversion if sustained due to the factors outlined above may play into the safe-haven characteristic of the greenback. In addition, US economic data reflects a robust economy in relation to inflation and labor. As has been the case for some time, the implied Fed funds futures suggests this may be the last hike from the Fed for 2023. Sustained strong inflation and jobs data could add pressure on the Fed to continue hiking leaving the euro exposed to further downside.

TECHNICAL ANALYSIS

Chart prepared by Warren Venketas, IG

The weekly EUR/USD chart above looks to be printing a long upper wick. If the weekly candle closes in this fashion, similar to a gravestone doji or shooting star, could point to subsequent downside for the pair. Coupled with a Relative Strength Index (RSI) approaching overbought territory, the technical features favor euro bears.

Chart prepared by Warren Venketas, IG

Daily EUR/USD price action shows the continuation of the ascending channel (black) from mid-March 2023. A break and confirmation close below channel support could support the weekly signals and bring into focus the 1.0900 psychological handle

Resistance levels:

• 1.1096
• 1.1000

Support levels:

• Channel support
• 1.0900

IG CLIENT SENTIMENT DATA: MIXED

IGCS shows retail traders are currently SHORT on EUR/USD, with 58% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment but due to recent changes in long and short positioning, we arrive at a short-term cautious disposition.

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