EUR/USD continues its run lower amid increasing Fed hike bets, surging Treasury yields
FUNDAMENTAL OVERVIEW
USD:
The US dollar continues to remain supported amid inflation worries and Fed rate hike bets. The markets started to grow more impatient amid the prolonged US-Iran stalemate and Strait of Hormuz closure. Traders are now pricing in a 50% chance of a rate hike by year-end.
On the US-Iran front nothing has changed. Trump continues to threaten Iran with new strikes if they don’t make a deal, while Tehran warns the US that they have gained military knowledge from previous hostilities and that “a return to war would feature many more surprises”.
The Fed is slowly abandoning the easing bias with more and more policymakers talking about the need of keeping all options on the table, and some explicitly bringing up rate hike possibilities.
If nothing changes before the June meeting, we might be in for a hawkish surprise as inflation continues to run hot and the US data remains resilient.
In the short-term, a resolution and the reopening of the Strait will likely weigh on the greenback on falling oil prices and increased rate cut bets. But if the Strait remains closed for longer and oil prices stay elevated, the risk of the Fed being forced to hike anyway increases.
EUR:
On the EUR side, a June rate hike is basically a done deal as policymakers hinted that the situation in the Middle East and oil prices will need to change markedly to steer them away from a rate hike.
The market is pricing in an 83% chance of a rate hike in June and a total of 70 bps of tightening by year-end (almost 3 rate hikes). As previously mentioned, this makes it harder for the euro to rally on interest rate expectations alone as the ECB is unlikely to “outhawk” the market pricing.
The recent economic data has been highlighting the bad combination of weaker economic activity and stronger price pressures. The ECB wants to err on the cautious side and deliver an insurance hike if the situation doesn’t change before June.
After that, we can expect the central bank to stay on hold until September at very least as they gather more data over the summer.
EURUSD TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that EURUSD broke below the key 1.1660 support zone, retested it and continued lower. If we get another pullback into the support turned resistance, we can expect the sellers to step in with a defined risk above it to keep pushing into the 1.4 handle next. The buyers, on the other hand, will look for a break to pile in for a rally into the downward trendline around the 1.1750 level.
EURUSD TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we have a downward trendline defining the bearish momentum on this timeframe. The sellers will likely continue 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 resistance.
EURUSD TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, there’s not much we can add here as the sellers will have a better risk to reward setup around the trendline or the resistance, while the buyers will need to wait for upside breaks to start piling in for new highs. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Today, we have the FOMC meeting minutes. Tomorrow, we get the Eurozone PMIs, the latest US Jobless Claims figures and the US Flash PMIs.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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