EurUsd Weekly Outlook, April 22, 2024 – Diverging Monetary Paths and the Test at 1.05

• Inflation remains stubborn, and Powell acknowledges this by adopting a hawkish approach, signaling to the markets that rate cuts are still off the table for now. Any notions of economic recession have been shelved, and indeed, some Fed members hint at further hikes in borrowing costs.
• The ECB seems more open to a rate maneuver at the upcoming June meeting, unless, Lagarde notes, temporary shocks could disrupt the path of economic growth and the decline in inflation.
• EurUsd holds just above the critical 1.05 support levels, which represents the last step before parity.

Powell’s Remarks and U.S. Data Stir Market Shifts and Rate Dynamics

A few words from Powell, spiced up by positive U.S. macro data (such as retail sales), have caused the stock market to retract by nearly 5%, boosted the dollar, and pushed interest rates back up to around 5%. Recession risks have vanished from the radar while inflation concerns reignite, especially with levels deemed acceptable by the Fed that are higher than the infamous 2%. This almost acknowledges a shift in paradigm from the pre-Covid era when the 2% threshold was almost a utopian target. A similar shift in interest rate policies from Japan bears witness to this.

Back to Powell, his words have been quite clear. Under current market conditions, returning to inflation targets seems an ambitious goal, and this might force the Fed to maintain tighter conditions longer than analysts anticipate. In plain terms, barring extraordinary events, U.S. interest rates will not fall in 2024.

If the June rate cut is now definitively sidelined in the current pricing of various asset classes, there remains some residual hope for maneuvers post-summer. Likely, the verdict of the stock markets (should the descent persist) will influence future Fed rate moves, which currently appear to be in no rush. More dovish (and this reflects on the euro) is the ECB’s view. President Lagarde has confirmed that a reduction in borrowing costs could be imminent unless there are shocks. The performance of the euro up to the next ECB meeting on June 6 will likely be a decisive factor in shaping the future path of euro rates, along with the increasingly tense geopolitical dynamics following the tit-for-tat between Iran and Israel.

Technical Analysis – Key EurUsd Levels Ahead of ECB Meeting

The weekly chart vividly displays the levels below or above which EurUsd’s technical structure will completely change. The 200-week moving average has acted as a barrier throughout 2023 until this March, when it once again fended off the euro’s bullish assaults. Looking downward, the same can be said for the 1.05 level, which increasingly resembles a potential bearish head and shoulders pattern, with the mentioned level acting as the neckline. Falling below this technical threshold would likely fuel a decline well below parity. It’s conceivable that the pair might reach this point before the June ECB meeting.

The typical oversold indicator, the RSI, has returned to below 30 points, marking the current phase as corrective and nearing exhaustion. At least, that’s what the most recent history of the pair seems to suggest. Each time it has entered this zone since 2022, when the euro recovered from its lows, the trend has reversed. The proximity to the 1.05 supports increases the likelihood that history will repeat itself in the coming months.