FUNDAMENTAL OVERVIEW
USD:
The US dollar regained some ground as both Trump and Iran rejected the respective war-ending proposals calling them unacceptable and leaving the two sides miles apart on any potential agreement. Moreover, Israeli PM Netanyahu confirmed that the removal of Iranian nuclear material remains an active war priority, and separate reports indicated that Trump told Netanyahu directly he wants to go in on Iranian nuclear sites.
This kind of headline noise has been going on for several weeks and kept the price action in rangebound mode as traders continued to wait for new developments before picking a direction.
Looking ahead, the Fed is slowly abandoning the easing bias amid resilient US data and elevated energy prices. The reopening of the Strait could weigh on the greenback in the short-term as oil prices will likely crater and rate cut bets will increase.
After that though, the focus will quickly turn back to the Fed and the economic data. With the end of the war, the increase in economic activity could keep inflation higher for longer and eventually even require rate hikes to bring it sustainably back to the 2% target that the Fed has been missing since 2021.
There’s also another scenario where the Strait remains closed for longer and oil prices stay elevated with the risk that the Fed turns hawkish and gives the greenback a strong boost given the bearish positioning on the dollar.
EUR:
On the EUR side, a June rate hike is not basically a done deal as policymakers hinted that the situation in the Middle East and oil prices will need to change markedly to hold them off from delivering a rate hike.
The market is pricing in an 84% chance of a rate hike in June and a total of 68 bps of tightening by year-end (almost 3 rate hikes). This makes it harder for the euro to rally on interest rate expectations as the ECB is unlikely to “outhawk” the market pricing.
The recent economic data has been highlighting the ugly combination of weaker economic activity and stronger price pressures. There was no strong case for multiple rate hikes. 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 as they gather more data over the summer.
EURUSD TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that EURUSD bounced around the 1.1650 support and rebounded into the 1.18 handle. There’s not much we can glean from this timeframe, so we need to zoom in to see some more details.
EURUSD TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can see the price action is now confined between the resistance zone around the 1.18 handle and the upward trendline. From a risk management perspective, the buyers will have a better risk to reward setup around the trendline to keep pushing into new highs. The sellers, on the other hand, will likely continue to step in around the resistance with a defined risk above it to target a pullback into the 1.1650 support.
EURUSD TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, there’s not much we can add here as the sellers will likely continue to lean on the resistance to keep targeting new lows, while the buyers will either wait for a pullback into the trendline or a break above the resistance to pile in for new highs. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Tomorrow we get the US CPI report. On Wednesday, we have the US PPI data. On Thursday, we get the US Retail Sales report and the latest US Jobless Claims figures.
