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Christine Lagarde said "it's very clear that the ECB isn't pausing” its rate hikes, adding that “we have more ground to cover” in a journey which they had not arrived at the destination yet. Those words from the ECB President helped to momentarily lift the EUR/USD around 50 pips off its earlier lows, helping to keep the bullish momentum alive in all euro crosses. But at the time of writing, it was losing momentum again, suggesting that markets were perhaps disappointed a little that the ECB was not more forceful. That said, my EUR/USD outlook remains bullish, and we see could rates climb to a new high on the year in the coming days for as long as the upcoming US data is not super strong.

ECB slows pace of tightening 

Earlier, the EUR/USD had edged lower by about 50 pips in the immediate aftermath of the ECB’s fully expected decision to slow the pace of tightening. Matching the Fed from the day before, it hiked interest rates by 25 basis points to 3.25% following three 50 bps previously. Yet, the selling pressure was mild, with the popular currency pair hovering around the key 1.10 handle and thus holding near 1-year highs as investors heard nothing exciting from the initial remarks of ECB President Christine Lagarde. Some of the key words from the policy statement were as follows:

• The inflation outlook continues to be too high for too long.
• Headline inflation has declined over recent months, but underlying price pressures remain strong.
• Future decisions will make rates sufficiently restrictive

EUR/USD outlook: FX pair likely heading to mid-1.10s 

For now, the EUR/USD has found some support near the key 1.10 handle as the ECB head said the central bank is not pausing and that there was more ground to cover, because of high inflation. 

Judging by Lagarde’s latest hawkish comments, the EUR/USD could be heading higher over time as the policy divergence continues to grow between the ECB and Fed’s monetary policies, with the latter hinting that it is pausing its rate increases at its decision on Wednesday. The ECB could hike rates at least two more times in the coming months, while the Fed is seen cutting rates later in the year. This should keep the EUR/USD supported on the dips.

The key risk facing our bullish EUR/USD outlook is the potential for profit-taking, given that that the long EUR/USD positions look a little overstretched, and the potential for a dollar recovery on the back of haven flows, should the banking crisis deepen. 

US dollar remains undermined despite Powell pushing back against rate cuts

Like the ECB, the Fed hiked rates by 25 basis points on Wednesday as had been highly anticipated. But by removing a key line from the statement that “some additional policy firming may be appropriate,” the market has interpreted that decision as a dovish move by the central bank. While the Fed didn’t rule out further rate increases on Wednesday, Chairman Powell said interest rate cuts are not on the table because of still-high inflation. Yet, the market again challenged his views, sending the dollar and bond yields lower in the immediate reaction to the FOMC’s rate decision and press conference. Tumbling regional bank stocks – highlighting financial stability risks – and a slide in crude oil prices, raising recession concerns, are both among reasons why the market thinks there will be no more rate hikes from the Fed, and that monetary policy will be loosened later in the year.

Key macro data for US dollar

The focus will now turn tun back to the US economy after the conclusion of both the Fed and ECB rate decisions. We will have two of the most important macro pointers on the economic calendar in the next few days. 

US non-farm payrolls

Friday, 5 May

13:30 BST

We have had weaker JOTS job openings, stronger ADP private sector employment report and mixed employment components in the ISM manufacturing and non-manufacturing PMIs. These mixed leading indicators for the official jobs report, due out on Friday, have helped to keep the dollar index above the February low at 100.82 for now. With markets being very sensitive to weak US economic data, USD bears could pounce at a whiff of weak employment data on Friday. 

US CPI

Wednesday, 10 May

13:30 BST

With the Fed’s rate decision out of the way, investors will continue to keep a close eye on US data. In recent times, the market has been repricing lower the Fed’s projected interest rate path, implying we have reached a peak. This has caused a significant downward move in the dollar. So, a lot of attention will be on CPI as investors figure out whether the Fed will indeed now pause or lift rates even more. 

EUR/USD technical analysis 

The EUR/USD has not been able to move significantly away from 1.1000 handle so far, which may worry the bulls a little given how hawkish Lagarde was at the ECB presser. While some of the momentum has clearly been lost, the bullish trend is still alive as we haven’t yet seen any key technical reversal patterns on the EUR/USD. Support is still being provided on the dips. So far, the region between 1.0900 to 1.0950 has held firm on several occasions, which will again come into focus if the EUR/USD breaks below 1.10 area. Th 21-day exponential moving average also comes into play around that area. For as long as rates hold above this area, the bulls will be happy. Otherwise, the bullish momentum will fade further, discouraging the bulls to stick around.

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Source: TradingView.com

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