The Euro (EUR) is experiencing a decline against the US Dollar (USD), falling back to January lows despite the European Central Bank's (ECB) rate hike bets. This is primarily due to the surge in the US Dollar, which has been bolstered by safe-haven demand amid the escalating US-Iran conflict. The market's realization that rate cuts may not be as imminent as initially expected has further contributed to the USD's strength.
The US Dollar's rally was fueled by the expectation that higher oil prices will exert upward pressure on inflation. The ISM Manufacturing PMI data, released yesterday, confirmed this, showing that the market had been overly dovish about the economy. The data remained hot for the second consecutive month, dispelling the notion of a one-off event. Additionally, the prices index reached its highest level since 2022, indicating persistent inflationary pressures. As a result, traders have scaled back their rate cut predictions, with the total easing now projected to be around 45 basis points by year-end, down from 58 basis points on Friday.
On the EUR side, the macro environment remains unchanged, but the US-Iran conflict has led to a surge in energy prices, which are contributing to higher inflation expectations. The Eurozone CPI, released today, exceeded expectations, and when combined with the higher energy prices, it has triggered rate hike bets. The market is currently pricing a 21% chance of a rate hike in June and a 50% chance by the end of the year. However, ECB policymakers are cautioning against an immediate reaction to Middle East events, as they could be transitory, similar to past occurrences.
The EURUSD pair is currently approaching a key swing level at 1.1575 on the daily chart. This level is expected to act as a significant support and resistance point. Buyers are anticipated to enter the market with a defined risk below this level, aiming for a rally back towards the 1.18 handle. Conversely, sellers will seek to break below this level, increasing bearish bets towards the 1.14 handle. The 4-hour and 1-hour charts provide additional technical insights, with the 1-hour chart showing a downward trendline that sellers may use as support during a pullback. Buyers, on the other hand, will aim to break above this trendline, targeting the 1.1740 resistance level.
Upcoming catalysts include the US ADP and US ISM Services PMI data, which will be released tomorrow. On Thursday, the latest US Jobless Claims figures will be unveiled, and on Friday, the week will conclude with the US Non-Farm Payroll (NFP) report. While these data points may not significantly impact the market this week due to the US-Iran conflict, they will still be closely watched by investors.
