FUNDAMENTAL
OVERVIEW
USD:
The US dollar
weakened on Friday despite a higher than
expected monthly core inflation reading. It was a strange reaction, as the
data boosted expectations for a Fed rate hike, with traders now pricing in a 93%
chance of an increase tomorrow. Moreover, surging
oil prices continue to add inflationary pressure and, given no end in sight, it
could make the Fed even more hawkish going forward. The odd reaction was eventually faded and the greenback rose to a new weekly high.
Looking ahead, the
focus will be on the FOMC decision tomorrow, with the Fed expected to hike
rates by 25 bps. This would be the first hike since 2023. Traders will be
attentive to any hawkish surprises, as these could give the US dollar a strong
boost on a more hawkish repricing of interest rate expectations.
The other major
focus will be the developments in the Middle East, as oil prices continue to
rise and fuel inflation concerns amid worsening disruptions and supply fears.
Oil prices have been the key driver of markets recently, so any de-escalation
in the Middle East could push oil prices lower and lead to a dovish repricing,
which could weigh on the greenback.
For now, I think
the fundamentals are more positive for the dollar and we would likely need a
de-escalation in the Middle East or a dovish Fed to change the picture.
EUR:
On the EUR side, the ECB
delivered a 25 bps rate hike last Thursday, taking the deposit rate to 2.50%
as widely expected. The more hawkish takeaway came from the inflation outlook
and the ECB’s growing concern that the Middle East-driven energy shock could
keep price pressures elevated for longer. The ECB now sees headline inflation
at 3.0% in 2026 and 2.5% in 2027, with both the 2027 and 2028 inflation
forecasts revised higher.
The decision also came with
a stronger growth assessment, with the ECB upgrading its 2026 and 2027 growth
forecasts as the euro-area economy has proved more resilient than expected.
This gives policymakers somewhat more room to keep tightening despite the
inflation shock.
The most important
development came after the decision. ECB
sources indicated that policymakers are already discussing another hike as
early as the October meeting if energy prices remain elevated and inflation
risks continue to broaden. This increased expectations for a rate hike in
October, with markets pricing in a 66% chance. Lagarde herself did not
pre-commit to October though, stressing a data-dependent, meeting-by-meeting
approach.
EURUSD TECHNICAL
ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can
see that EURUSDbroke below the key 1.1560
support and stalled around the lower bound of the falling channel. If we get a
pullback into the upper bound of the channel, we can expect the sellers to step
in there with a defined risk above the upper bound to position for a drop into the
1.1400 support. The buyers, on the other hand, will want to see the price
breaking higher to increase the bullish bets into the 1.1711 level next.
EURUSD TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we have
a downward trendline defining the bearish momentum. If we get a pullback, the
sellers will likely lean on the trendline with a defined risk above it to keep
targeting new lows. The buyers, on the other hand, will look for a break higher
to pile in for a rally into the upper bound of the channel.
EURUSD TECHNICAL ANALYSIS –
1 HOUR TIMEFRAME
On the 1 hour chart, there’s
not much we can add here as the sellers will have a better risk to reward setup
around the downward trendline, while the buyers will need a break above it to
gain more conviction for further upside. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Tomorrow, we have the
FOMC rate decision. On Thursday, we get the US Jobless Claims figures. Traders
will also keep a close eye on developments in the Middle East.
This article was written by Giuseppe Dellamotta at investinglive.com.