The EUR/USD currency pair is experiencing a downward trend, primarily driven by the Federal Reserve's (Fed) increasing bets on rate hikes and soaring Treasury yields. This dynamic is creating a challenging environment for the Euro, which is struggling to maintain its value against the US Dollar. The situation is further complicated by the prolonged US-Iran stalemate and the closure of the Strait of Hormuz, which has heightened market impatience and uncertainty. The markets are now pricing in a 50% chance of a rate hike by year-end, with traders closely monitoring the situation.
The US-Iran tensions remain unresolved, with President Trump threatening new strikes if Iran doesn't make a deal, while Tehran warns of military surprises if the US returns to war. This ongoing conflict is contributing to the overall uncertainty in the market. The Fed is gradually shifting away from its easing bias, with policymakers discussing the need to keep all options open and some explicitly mentioning rate hike possibilities. The June meeting is a critical juncture, as a lack of change could lead to a hawkish surprise, especially with persistent high inflation and resilient US data.
In the short term, a resolution to the Strait of Hormuz closure and a reduction in oil prices might temporarily weaken the US Dollar. However, if the Strait remains closed for an extended period and oil prices remain elevated, the risk of the Fed hiking rates increases. This dynamic could significantly impact the EUR/USD pair.
On the EUR side, a June rate hike is highly anticipated, with policymakers indicating that significant changes in the Middle East and oil prices are needed to avoid it. The market is pricing in an 83% chance of a rate hike in June, with a total of 70 basis points of tightening by year-end, equivalent to almost three rate hikes. This makes it challenging for the Euro to rally solely based on interest rate expectations, as the European Central Bank (ECB) is unlikely to 'out-hawk' the market pricing.
The recent economic data highlights a concerning combination of weaker economic activity and stronger price pressures. The ECB is cautious and may deliver an insurance hike if the situation doesn't improve before June. After that, the central bank is expected to maintain its current stance until September, gathering more data over the summer.
Technical analysis of the EUR/USD pair on various timeframes provides valuable insights. On the daily chart, the pair has broken below the key 1.1660 support zone, retesting it and continuing lower. If there's another pullback into the support-turned-resistance area, sellers are likely to step in, pushing the pair towards the 1.1750 level. Buyers, on the other hand, will seek a break above the 1.1660 zone to initiate a rally.
The 4-hour chart shows a downward trendline defining the bearish momentum. Sellers are expected to continue leaning on this trendline, pushing the pair into new lows. Buyers will aim to break above the trendline to extend the pullback into the resistance area. The 1-hour chart offers limited additional insights, with sellers having a better risk-reward setup around the trendline or resistance, while buyers will need to wait for upside breaks to start piling in for new highs.
Upcoming catalysts include the FOMC meeting minutes, Eurozone PMIs, US Jobless Claims figures, and US Flash PMIs. These events will provide further insights into the market's sentiment and potential future movements, influencing the EUR/USD pair's trajectory.
