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The EUR/USD pair ended the trading week at 1.0749, which is within the range of 1.0650 to 1.0770, where it has been trading for the second consecutive week. Take a look at the weekly chart: the pair is essentially treading water, although it exhibits significant intra-week volatility. Last week, sellers attempted to approach the 1.06 level, while this week, buyers took the lead, trying to approach the upper limits of the 1.08 level. However, both bulls and bears ended up losing.
We can now confirm that the trend has been paused or possibly ended. Throughout the three weeks of May, the pair experienced active declines, dropping from 1.1055 to the 1.06 level. But then the downward momentum faded, and the pair found itself stuck in a sideways market. Neither the bears nor the bulls have been able to break out of the aforementioned price range, despite attempts to do so.
On one hand, this is not surprising: traders are not willing to take one-sided positions ahead of key events in the current month. Take note that on June 14, we will learn the outcome of the Federal Reserve's June meeting, followed by the outcome of the European Central Bank's meeting the next day. It is clear that traders are reluctant to invest in or divest from the dollar on the eve of such "grand events." The same applies to the euro.
On the other hand, the price dynamics of EUR/USD over the past two weeks have been anomalous.
To be more precise, traders' reaction to various fundamental events has been anomalous. For example, after the eurozone inflation report, the pair surged, despite the report reflecting a slowdown in both overall and core consumer price index. Traders also reacted cautiously to other negative European reports. Despite the downward revisions to the May PMIs and the stagnation of retail trade volume (on a monthly basis), the euro held its ground: after another dip towards the 1.06 level, the pair found itself above the 1.07 mark again.
Furthermore, the EUR/USD pair managed to withstand even more significant blows. Eurostat recently confirmed a technical recession in the eurozone: according to revised data, the European economy contracted by 0.1% in the first quarter. This is the second consecutive quarter of contraction, as the fourth quarter of last year also saw a 0.1% decline.
Despite such notable blows, the EUR/USD pair has managed to repeatedly recover from the 1.06 level and attempted to approach the upper limit of the range between 1.0650 and 1.0770.
While dollar bulls reacted quite painfully to any signs of weakness from the US economy, even minor reports provoked a strong reaction from traders. For example, the dollar declined significantly when the initial jobless claims indicator was in the "red," reflecting three consecutive weeks of growth. This is essentially a secondary macroeconomic indicator, but in the current circumstances, it triggered increased volatility for the EUR/USD pair, and not in favor of the greenback.
Dollar bulls also reacted adversely to the ISM indices, both in the services sector and the manufacturing sector, which fell significantly short of forecasts.
All of this suggests that traders of the EUR/USD pair are more inclined to "believe" in the hawkish decisions of the ECB despite inflation slowing down in the eurozone and a technical recession, and are less inclined to "believe" in the hawkish sentiment of the Fed, despite the growth of the core PCE index, decent Non-Farm Payrolls, and hawkish statements from some Fed officials. This sentiment is also reflected in the CME FedWatch Tool, which indicates that the probability of a 25 basis points rate hike at the June meeting is only 29%. Therefore, the probability of maintaining the status quo is 71%.
This explains the euro's "resilience", which ignored the slowdown in eurozone inflation but rose in response to ECB President Christine Lagarde's words. She expressed hawkish rhetoric on Thursday, expressing concern about high inflation and advocating for further tightening of monetary policy. ECB Vice President Luis de Guindos voiced a similar position. According to him, although the latest inflation report is positive, it is still far from the target levels. In this context, he supported the idea of further rate hikes.
The euro's resilience helped the bulls stay near the upper limit of the 1.0650-1.0770 range. However, this preliminary outlook can play a cruel trick on them. If the Fed demonstrates a hawkish stance contrary to subdued expectations (a quarter point rate hike and does not exclude further steps in this direction), we may witness another dollar rally. Especially considering that the ECB may disappoint buyers of the EUR/USD pair, even if it raises rates (but with a "concluding" tone in its rhetoric).
That is why it is advisable to stick to a wait-and-see position on the pair in the near future (until the ECB meeting). Regulators can significantly "reassess" the fundamental picture for the pair: Thursday's outsider can instantly become the favorite. However, an alternative scenario cannot be ruled out, where the Fed demonstrates a more restrained position while the ECB becomes aggressive.
The intrigue remains, but it will be resolved very soon, in just a few days.
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