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Euro Weekly Forecast: EUR/USD Upside Rally May be Waning after ‘Hawkish’ ECB

Euro Weekly Forecast: EUR/USD Upside Rally May be Waning after ‘Hawkish’ ECB

Warren Venketas, Analyst
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EUR/USD ANALYSIS

  • Markets may be getting carried away post-ECB.
  • Euro bond spreads thinning.
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EURO FUNDAMENTAL FORECAST: BEARISH

Yesterday saw a significant upside shift in EUR/USD price action (largest single day move since December 2020) after the ECB’s President Christine Lagarde acknowledged more persistent inflationary risks.

A previously omitted 2022 rate hike has now been put back on the table resulting in a more hawkish ECB as perceived by markets. The interest rate probabilities across future meeting dates were dancing almost uncontrollably with markets now settling in on almost two potential rate hikes for 2022. This could be an overestimation under current circumstances, leading to upcoming Euro weakness.

ECB INTEREST RATE PROBABILITIES

Euro Weekly Forecast: EUR/USD Upside Rally May be Waning after ‘Hawkish’ ECB

Source: Refinitiv

Strong NFP data bolstered the dollar late on Friday further supporting Fed tightening along with a marginally softer unemployment rate at 4%. Regardless, the labour market in the US remains extremely tight giving added impetus for Fed lift off.

The Euro 5-year by 10-year interest rate swap spreads below have rapidly declined post-ECB extending the already narrowing spread. A narrowing spread reflects imminent rate hikes short-term while the longer end of the curve (albeit rising at a slower pace) could suggest markets anticipation of weaker economic growth.

EURO 5/30-YEAR INTEREST RATE SWAP SPREAD

Euro Weekly Forecast: EUR/USD Upside Rally May be Waning after ‘Hawkish’ ECB

Source: Refinitiv

Russia/Ukraine tensions cannot be dismissed in EUR/USD analysis just yet. Should pressures escalate in the region, markets could flock to safe-haven assets in which case the US dollar should trump the Euro weighing down on the EUR/USD cross.

Next weeks economic calendar is relatively light with US inflation being the standout event. A slight miss may not be enough to sway hawks or the Fed’s current outlook but an inflation beat may seriously boost USD bulls.

Euro Weekly Forecast: EUR/USD Upside Rally May be Waning after ‘Hawkish’ ECB

Source: DailyFX Economic Calendar

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

Euro Weekly Forecast: EUR/USD Upside Rally May be Waning after ‘Hawkish’ ECB

Chart prepared by Warren Venketas, IG

Friday’s extended upper long wick candle may point to consequent downside towards the 1.1400 support zone and beyond. The weeks upside rally may be fading along with likely profit taking supporting EUR/USD bears.

Resistance levels:

  • 1.1500

Support levels:

  • 1.1400/100-day EMA
  • 50-day EMA
  • 20-day EMA
  • 1.1300

IG CLIENT SENTIMENT DATA: BULLISH

IGCS shows retail traders are currently long on EUR/USD, with 38% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, the recent change in long and short positions respectively result in an upside bias.

Contact and follow Warren on Twitter: @WVenketas

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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