EUR/USD Consolidates Amid ECB Hikes and US-Iran Tensions
The EUR/USD pair has entered a period of consolidation, reflecting the market's cautious stance in the face of widely anticipated European Central Bank (ECB) interest rate hikes and the ongoing stalemate between the United States and Iran. This dynamic has led to a range-bound market, with traders awaiting fresh catalysts to guide their next moves.
The US Dollar's Resilience
The US dollar has demonstrated resilience this week, partly due to the rejection of war-ending proposals by both the US and Iran, as well as higher-than-expected US inflation data. However, the market remains hesitant, with traders adopting a wait-and-see approach. The Federal Reserve's (Fed) gradual shift away from easing bias is notable, as more policymakers emphasize the need to keep all options open, with some explicitly discussing rate hikes.
The reopening of the Strait of Hormuz could temporarily weaken the US dollar, as oil prices are expected to decline rapidly, potentially leading to increased rate cut bets and easing inflation concerns. However, this effect is likely to be short-lived. The end of the war could result in higher inflation for an extended period, potentially necessitating rate hikes to achieve the Fed's 2% inflation target, which has been elusive since 2021.
An alternative scenario involves the Strait remaining closed for an extended period, keeping oil prices elevated. In this case, the Fed might still turn hawkish, providing a significant boost to the US dollar despite bearish positioning.
EUR's Delicate Position
On the EUR side, the market pricing in an 87% chance of a June rate hike and a total of 70 basis points of tightening by year-end (almost three rate hikes) is intriguing. This makes it challenging for the euro to rally solely on interest rate expectations, as the ECB is unlikely to 'out-hawk' the market pricing.
Recent economic data has highlighted a concerning combination of weaker economic activity and stronger price pressures. This situation doesn't yet justify multiple rate hikes, and the ECB is adopting a cautious approach, considering the possibility of an 'insurance hike' if conditions don't improve before June.
After June, the ECB is expected to maintain a holding stance until September, gathering more data over the summer.
Technical Analysis
The EUR/USD pair's technical analysis provides further insights. On the daily chart, the pair has rejected the resistance zone around the 1.18 handle and is now approaching the support zone around 1.1660. A break below this support could trigger a rally back into the resistance, while a break lower could increase bearish bets into the 1.15 handle.
On the 4-hour chart, the price is consolidating near a broken upward trendline, with sellers expected to step in around these levels, while buyers await a rise back above the trendline to initiate a rally into the resistance.
The 1-hour chart reveals a similar pattern, with sellers having a better risk-reward setup around the broken trendline, while buyers must wait for a drop into support or a rally above the trendline.
Upcoming Catalysts
Key economic events, such as the US Retail Sales report and the latest US Jobless Claims figures, will be closely watched for further market direction. These catalysts will play a pivotal role in shaping the EUR/USD pair's trajectory in the coming days.
