FUNDAMENTAL OVERVIEW
USD:
The US dollar has been supported since the last FOMC decision but as the hawkish repricing reached a near-term peak, the momentum waned as traders shifted their focus to the key US data.
Right now, the market is pricing in a 29% chance of a rate hike in July, which rises to 65% in September. I’m pretty sure we will need notable upside surprises in the data to force the Fed to hike already in July. September would be the preferred month for them as they also release the SEP and the dot plot.
Given the Fed’s focus on inflation, the US CPI will likely be more important for market pricing unless we get a blockbuster NFP report. In line or worse than expected data, should lead to a pullback pretty much across the board, with the greenback coming under pressure from some dovish repricing. On the other hand, upside surprises should keep supporting the dollar.
EUR:
On the EUR side, the recent inflation data showed a welcome easing for the ECB which, coupled with the quick drop in energy prices to pre-war levels, greatly diminished the urgency for further tightening. This is also what policymakers have been communicating via their recent speeches which seals a pause in July (unless something really bad happens on the US-Iran/Strait of Hormuz side).
The market is still pricing in a 30% chance of a hike in July but that should now stand much lower. There’s a total of 27 bps of tightening still priced in by year-end which suggests the market is expecting at least another rate hike from the ECB. For now, the data supports a prolonged pause.
EURUSD TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that EURUSD pulled back into the broken support zone around the 1.14 handle and started to consolidate awaiting the key US data. From a risk management perspective, the sellers will have a better risk to reward setup around the downward trendline to position for a drop into the 1.10 handle next. The buyers, on the other hand, will want to see the price breaking higher to open the door for new highs and target the 1.18 handle.
EURUSD TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can see more clearly the rangebound price action around the 1.14 resistance. There’s not much we can glean from this timeframe, but the resistance zone should act as kind of barometer in the short-term with the price staying below it being more bearish and above it being more bullish. The data US data will have the final say.
EURUSD TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, there’s not much we can add here but if we get a spike lower on a good NFP report, we might not see much follow through until the US CPI as traders might want to wait for inflation data to confirm whether an earlier than expected rate hike could come, nonetheless, the pair would remain skewed to the downside. On the other hand, if the NFP report comes in line or even worse than expectations, we will likely see EUR/USD extending the pullback into new highs and target the downward trendline next. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Today, we get the US NFP report and the US Jobless Claims figures.
