- EUR/USD is holding up quite well despite risk-off conditions and weak EZ data in the mid-1.0500s.
- The main event risk of the week will be the US CPI on Wednesday.
- The divergence in Fed and ECB policies should keep the pair short on rallies for now, many strategists think.
The EUR/USD has held up surprisingly well on Monday in the face of a further sharp decline in the global equity space that would normally support the safe-haven US dollar plus Eurozone Sentix survey data for May. For now, the pair is trading sideways at 1.0550, having found support earlier in the session after a brief drop below 1.0500.
Traders are citing concerns about central bank tightening, also reflected in a further rise in US, European and global yields on Monday, as a factor weighing on risk appetite at the start of trading. week. Meanwhile, familiar themes of slowing global growth amid continued global supply chain difficulties plus the disruptive impact of the Russo-Ukrainian war and China lockdowns are also cited as factors weighing on sentiment.
If risk assets continue to trade against the ropes this week, that would suggest further EUR/USD decline. The key event of the week will be US consumer price inflation data due out on Friday, which is expected to show the year-on-year pace of headline price growth slowing to 8.1% in April from 8.5% from March.
While this will be a welcome decline that could give EUR/USD a short-term boost, with the headline CPI rate still well above the Fed’s 2.0% target, no dovish change in Fed policy is expected. Fed in the short term. Last week’s policy announcement and subsequent rhetoric suggest that the Fed is still trying to get interest rates back to neutral (around 2.5%) by the end of the year and then likely substantially higher in 2023, as the bank seeks to cool demand and ease inflation.
Meanwhile, the ECB, while expected to bring interest rates positive by the end of this year (also a big aggressive shift from the bank’s policy stance just a few months ago), is not expected to tighten policy. money so fast. Many traders may continue to see EUR/USD as “sell on rallies” for now, with resistance in the form of 2020 lows in the 1.0630 area likely to prove formidable.
In the longer term, a drop in EUR/USD to 2016 lows at 1.0350 still seems likely. Many banks have called for the pair to return to parity by the end of the year if US inflation doesn’t decline as much as the Fed expects, forcing them to signal their intention to raise interest rates well above the neutrality (say to 4.0% or more) by the end of 2023.
Technical levels
Source: Fx Street
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