The Federal Reserve decided to maintain interest rates at 5.00-5.25% last week. This choice was motivated by their desire to gather additional economic data before determining whether another hike is appropriate. Their aim is to strike the right balance of monetary restraint that can effectively lower inflation to the target level, while minimizing adverse effects on the economy.
In contrast, the European Central Bank (ECB) followed expectations and raised interest rates by 25 basis points. They also hinted at a potential additional increase in July. ECB speakers have reiterated this stance and signalled the likelihood of another hike in September if the prevailing conditions warrant such action. As a result, a divergence in monetary policies has emerged between the Federal Reserve and the ECB, ultimately benefiting the Euro.
EURUSD Technical Analysis – Daily Timeframe
On the daily chart, we can see that EURUSD has now completely erased all the Dollar strength seen in May and it’s eyeing again the 1.1033 high. Last time, the pair had a hard time at this resistance, so we will likely need strong fundamental catalyst to see a breakout. This may come in the form of hot inflation data for the Eurozone or weak, but not too weak, data for the US. Anyway, the price looks overstretched as depicted by the distance from the blue 8 moving average. In such cases, we can generally see some consolidation or a pullback into the moving average before the next move.
EURUSD Technical Analysis – 4 hour Timeframe
On the 4 hour chart, we can see that this latest extension to the upside is diverging with the MACD. This is generally a sign of weakening momentum often followed by pullbacks or reversals. In fact, from a risk management perspective, the buyers would be better off waiting for a pullback into the 1.0950 support where we can also find the trendline before considering new long positions, all else being equal.
EURUSD Technical Analysis – 1 hour Timeframe
On the 1 hour chart, we can see that the price is rallying towards the 1.1033 high today. That is where we should expect some sellers piling in with a defined risk above the level targeting a pullback into the trendline.
Today we have the US Jobless Claims report and tomorrow we conclude the week with the US PMIs. Big misses should lead to more USD weakness as the market would price out the rate hike in July, while big beats should result in Dollar strength as the market would see the “two more rate hikes” expected by the Fed more likely.