FUNDAMENTAL OVERVIEW
USD:
The US dollar has been consolidating against most major currencies since Monday. The US CPI report yesterday came mostly in line with expectations and helped alleviate some of the most hawkish fears. The market pricing hasn’t changed though as traders continue to price in 24 bps of tightening by year-end, down very slightly from 25 bps seen before the CPI release.
As mentioned previously, we can now expect the Fed to drop the easing bias at the upcoming meeting, but the focus will be mostly on the dot plot and forward guidance. Even though a rate hike is now fully priced in, if the Fed endorses the market pricing, it will effectively confirm that the bias has now shifted to tightening and might trigger another rally in the greenback.
The question for markets is now when and how many rate hikes the Fed might deliver by year-end. The US-Iran standoff doesn’t look like it’s going to resolve anytime soon, so that’s going to keep energy prices elevated and force the Fed to act.
EUR:
On the EUR side, the ECB is widely expected to hike interest rates by 25 bps today bringing the deposit rate to 2.25%, and maintain the data-dependent and meeting-by-meeting approach. The central bank will also release new economic projections where inflation is expected to be upgraded for 2026 but remain unchanged for 2027 and 2028.
The rate hike will be framed as an "insurance" action to lean against the risk of second-round effects and maintain credibility, especially in light of upward revision to inflation projections. The ECB will stress that the current context is very different from 2022 and the central bank is well-positioned to navigate the geopolitical and inflation shocks.
The focus today won't be on the rate hike as that's already priced in, but on ECB's reaction function and signal/hints about the next policy moves. The market is pricing in 70 bps of tightening by year-end, which means traders basically expect two more rate hikes to follow. 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.
Although the ECB will likely keep the door open for more action if necessary, I feel like the overall tone might sound more dovish compared to market expectations and that could weigh on the euro.
EURUSD TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that EURUSD extended the drop into the 1.15 handle recently following the hot US NFP. The natural target for the sellers should be the March low around the 1.14 mark. If we get a bigger pullback, we can expect the sellers to step in around the 1.1650 resistance and the downward trendline to keep pushing into new lows. The buyers, on the other hand, will need a break above the trendline to open the door for a rally into the 1.18 handle next.
EURUSD TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we have another downward trendline defining the bearish momentum on this timeframe. If we get a pullback from current levels, 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 resistance.
EURUSD TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we have a minor support zone around the 1.1525 level. The buyers will likely continue to step in around the support with a defined risk below it to keep targeting the trendline. The sellers, on the other hand, will look for a break to increase the bearish bets into new lows.
The red lines define the average daily range for today.
UPCOMING CATALYSTS
Today, we have the ECB rate decision, and the US Jobless Claims and US PPI data. Tomorrow, we conclude the week with the University of Michigan consumer sentiment survey.
