EURUSD is hovering around the 1.08 level at the start of this shortened post-Easter trading week. The pair has fallen a long way from levels above 1.15 in late 2021 to now testing a multi-year support zone at the 1.08 area.

As can be seen on the chart below, 1.08 is where the 2020 Covid lows are located. The lows from the 2011-2017 period are also nearby. This is a crucial support area for EURUSD. If it breaks, we could be in for an acceleration of the bearish price action. The 1.05 area stands as the next big weekly support lower.

To the upside, the 1.10 zone remains a key resistance that keeps the downtrend firmly intact. Above it, the 1.1150 – 1.12 zone is the next technical resistance.

The dollar is extending the rally as the policy gap between the Fed and other central banks continues to widen. US Treasury yields climbed further, and over the Easter break, Fed speakers kept talking about fast QT and 50bp rate hikes. The most hawkish voice at the Fed, St. Louis Fed President James Bullard (voter this year), even talked about the possibility for even larger, 75bp rate hikes. He wants to swiftly raise rates to 3.5%, which in his view will effectively curb inflationary pressures.

US data released over the past week confirms the Fed’s concerns and is in line with their plans. Retail sales were solid and came at expectations, while inflation climbed again to 8.5% y/y for the headline figure and 6.5% for the core CPI. In the meantime, the labor market remains strong, with the unemployment rate hovering near pre-Covid levels. The Fed has all the reasons to tighten aggressively, and while previously some have doubted the Fed’s rhetoric, the markets are now starting to believe the hawkish narrative. Few other central banks are in the same position, and this divergence should continue to underpin the USD dollar during this and the following weeks.

The calendar is light, with only housing data, the Philadelphia Fed manufacturing index, and other 2nd tier data. There are also speeches from several Fed Presidents as well as Chairman Powell, who are all likely to repeat the similar hawkish messages from recent occasions as a lead-in to the Fed meeting on May 4.

The ECB didn’t live up to the expectations of EUR bulls and delivered a fairly dovish message at last Thursday’s meeting. Although they confirmed QE will end over the summer, and rate hikes will likely come in the autumn, they kept policy largely unchanged from the March meeting. The most bullish EUR traders have hoped for more - an earlier end of QE and start of rate hikes.

The ECB is stuck between a rock and a hard place. Inflation is high, but the hit to economic growth from the Russia-Ukraine war could be even greater. So, while they want to be hawkish in response to the high inflation, the slowing economy is limiting the scope to tighten policy. Ultimately, the weakening economy will have a downside impact on inflation too; hence the ECB doesn’t need to rush into tightening like others (e.g., the Fed).

In the Fx market, this policy divergence should keep downtrends in EURUSD and other EUR pairs intact. Traders will also focus on the French election on Sunday, April 24, though sitting President Macron is widely expected to win it. Nonetheless, should there be any surprises, such as a Le Pen win, it would add to the troubles for the Eurozone and be negative for the euro currency.

On the calendar, the focus will be on the flash services and manufacturing PMI data due on Friday. ECB President Lagarde will also speak at a panel discussion on Thursday.