Euro Soars on Broad-Based U.S. Dollar Weakness. Will EUR/USD Extend its Recovery?

EURO FORECAST:

• Euro strengthens more than 1% against the U.S. dollar on Thursday
• Broad-based greenback weakness and hawkish ECB commentary boost the common currency
• This article looks at EUR/USD key technical levels to keep an eye on in the near term

Most Read: April UK Inflation Hits a 40-Year High at 9%, GBP/USD Slides

EUR/USD soared on Thursday, rising 1.2% to 1.0590 in late morning, boosted by a broad pullback in the U.S. dollar amid falling U.S. government yields. Greenback’s weakness may also reflect some profit taking on long positions after the American currency, measured by the DXY index, has gained almost six percent since the start of the quarter, reaching extreme overbought conditions in recent days.

At the same time, the euro also received support from monetary policy repricing after European Central Bank official Klaas Knot signaled yesterday that a 50-bps rate hike could be possible at the July meeting. Following these comments, traders have started to discount about 105 bps of tightening for the year, up from 95-bps earlier this week.

While the account of the ECB’s latest meeting released today failed to offer any pledges on the timing of the lift-off or the magnitude of the first hike, it indicated in no uncertain terms that policymakers are growing increasingly concerned about soaring price pressures, with many members pushing to act without delay.

With inflation nowhere near its peak and only expected to top out around 9% in the second half of the year, hawks could win the policy battle and nudge the central bank to adopt a more aggressive stance on the tightening cycle. If we see a hawkish pivot in the near term, markets could begin to discount a steeper normalization path, creating a better environment for the euro to stabilize and mount a moderate recovery.

It is true that the U.S. dollar’s yield advantage is a headwind for the common currency, but it is possible that we have already seen peak in Fed hawkishness for now, so US rates may not go much higher from current levels. The ECB has not gone through the hawkish phase yet, but when the winds shift, the euro could stand to benefit.

EUR/USD TECHNICAL ANALYSIS

The EUR/USD has bounced strongly from last week's low and appears to be heading towards key resistance in the 1.0642 area created by the May high. If the bulls manage to charge higher and drive the exchange rate above this barrier, we could see a move towards cluster resistance spanning from 1.0790 to 1.0800, where the 50-day simple moving average converges with the 38.2% Fibonacci retracement of the 2022 sell-off. On the flip side, if sellers return and spark a bearish reversal, initial support appears at 1.0460, followed by 1.0350, this year’s low.

EUR/USD TECHNICAL CHART

EUR/USD Chart Prepared Using TradingView

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---Written by Diego Colman, Market Strategist for DailyFX