EUR/USD Supported at the Start of an Eventful Week

EUR/USD Analysis

The common currency found support over the past two weeks and starts the new one with positive undertone, but shows indecision at key technical levels, as the monetary policy differential is unclear. It reclaims the EMA200 and this provides an opportunity to extend its recovery towards 1.1017, but will need strong catalyst and the upside does not look friendly. It has been unable so far to move past the 38.2% Fibonacci of the last leg down and this keeps risk for a return to 1.0964, although sustained weakness below 1.0634 looks hard.

In any case, the pair's trajectory will be determined by this week's high impact events. On Friday we get the US employment update after the last report had shown the biggest jobs addition in a year. This underscored the labor market tightness that makes it harder for the Fed to change tack, but conditions are coming into better balance.

Chair Powell testifies in Congress on Wednesday and Thursday, just a couple of days before the communication blackout period kicks in. The Fed has pointed to peak rates and three cuts this year, but robust labor market, strong economy and some persistence inflation raise the bar for a pivot. As such officials have adopted a reserved stance toward lowering rates.

The European Central Bank announces its policy decision on Thursday and markets expect its to stand pat on rates. It has hinted that it is done tightening, but has been more hawkish than the Fed. It has pushed back against rate cut expectations, but markets will be looking forward for any update. Inflation has come down sharply over the past few months and Europe's economic hardships make the ECB a better candidate for a pivot, compared to its US peer.