EUR/USD at Crucial Tech Levels Ahead of ECB & Fed Policy Decision
EUR/USD Analysis
Last week's decisions by the central banks of Canada and Australia highlighted the fact that central banks are all over the place lately. There is also some uncertainty around the Fed and as to whether to hike or not at Wednesday's meeting, as divisions have appeared amongst its members.
Having delivered a massive amount of tightening since the March 2022 lift-off (400 bps), the central bank had opened the door a pause last month. Right before the communication blackout period, two voters argued in favor skipping a hike at the upcoming meeting, but kept the door open to more firming. Markets adjusted to that and CME's FedWatch Tool currently assigns the highest probability to rate staying at 5.25% this time, but still prices in one more increase after that.
On the other hand, some officials have argued against staying on the sidelines, as the labor market is still tight with elevated wages and inflation is far from the 2% target. Adding another layer of unpredictability around the outcome, the latest CPI inflation figures are released a day ahead of the decision.
The situation appears to be more straightforward around the European Central Bank, which has maintained a clearly hawkish stance and has pointed to pointed to the need for more tightening, with markets widely anticipating another rate hike this Thursday. However, the latest economic releases create an interesting backdrop. Preliminary data showed a significant deceleration in both core and headline inflation in May, while the economy surprisingly contracted by 0.1% q/q in the first quarter.
EUR/USD has been moving sideways lately at crucial technical levels, in anticipation of the upcoming critical monetary policy decisions, which will likely determine its trajectory. The pair bounced last week, but failed ahead of the 1.0800-10 region, which contains the 38.2% Fibonacci of the April high/May low slump, the EMA200 and the daily Ichimokou Cloud.
As long as the common currency is constrained below this region, there is clear risk of lower lows (1.0634) and the 2023 lows remains in play (1.0481), although the current policy outlook is hard to justify sustained weakness at and below this level.
EUR/USD however is in firing distance of the 1.0800-10 crucial confluence and daily closes above it will give it the opportunity to resume its uptrend, but will need a strong catalyst to convincingly exit the cloud (1.0970-90).
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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