The EURUSD retracement lost momentum as soon as the pair entered the 1.07 - 1.08 resistance zone. The attempt was held back, though a convincing sign that the bulls have been rejected here is yet to come. EURUSD remains close to the resistance zone and opened the new week above the 1.07 level.

While a break through this strong 1.07-1.08 resistance zone is not likely – should it happen – EURUSD could accelerate the corrective move higher. Still, even in this scenario, the next important resistance is not far at the 1.10 area. This is also a robust resistance area; in fact, a more critical one based on the weekly and monthly charts.

To the downside, 1.05 and 1.0350 remain the technical levels worth our attention. Below them, traders’ focus will shift to the parity zone (1.00) as the next support zone.

The dollar finished the past week moderately stronger, finding a bid into the Friday close on that solid Nonfarm payrolls report. Coming in at 390k, the NFP beat the consensus expectations of 325K. Other parts of the jobs data were mixed but healthy overall and will undoubtedly keep the Fed firmly on its hawkish trajectory of quantitative tightening (QT) and 50bp rate hikes. Thus, after two weeks of correcting lower, the dollar may be ready to rebound higher again and can perhaps even resume its uptrend to fresh highs.

The long-term bullish factors for the US dollar haven’t changed. With inflation being slow to come down from 40y highs above 8% and the jobs market robust, Fed communication is set to remain very hawkish. QT starts this month and, coupled with the 50bp rate hikes, will deliver a significant amount of monetary tightening this year. Such instances of massive Fed tightening tend to be broadly positive for the US dollar and relatively negative for risk assets. This means that the US dollar may continue to receive support from a slight risk-averse environment in the coming months, in addition to the yield advantage coming from the Fed interest rate increases.

The CPI inflation report on Friday is the main focus on this week’s economic calendar. The dollar can strengthen if inflation prints above the consensus forecasts of 8.3% headline and 5.9% core y/y. A downside surprise in these numbers, on the other hand, could result in the USD staying in its consolidation range.

ECB communication has been turning increasingly hawkish recently due to the several high CPI inflation prints that took Eurozone inflation above 8% y/y. Some hawks on the ECB governing board (Klaas Knot) even touted the idea of a 50bp rate hike at the July meeting. Fx and bond markets have responded and repriced higher expectations for ECB tightening, and this was reflected in the upside correction in EUR currency pairs.

The EUR may remain resilient in the very near term as the thought of a large 50bp rate hike by the ECB is a new and entertaining idea for markets to speculate on. Traders will hence especially watch the ECB meeting this Thursday for any inputs about this and for clues into the ECB’s thinking. However, it’s worth noting that the most recent speeches by President Lagarde were much more toned-down and neutral compared to some of the ECB hawks.

The ECB keeping a similar neutral message looks like the most likely scenario for this meeting on Thursday. Around that, there are possibilities for a hawkish or dovish surprise, depending on what the ECB will choose to focus its worries on:

• 1) more worried about inflation (hawkish - considering 50bp rate hikes as an option – EUR likely bullish reaction on Thursday)
• 2) or about the deteriorating growth outlook (dovish – possibility for 50bp hikes dismissed – EUR may sell-off this Thursday).

However, despite the hawkish talk, how much the ECB can actually do remains a big question. The likelihood of the ECB out-hawking the Fed and other hawkish central banks this year is pretty low. For instance, the dismal growth outlook is likely to be the big negative that will eventually stifle any efforts by the ECB to tighten policy. The divergence between the ECB and the rest is here to stay; thus, the euro is unlikely to have bottomed yet for this cycle.

The EUR calendar this week is very quiet other than the ECB, which means we may see little volatility in EUR pairs outside of the Thursday meeting.