The bear trend as defined by this downward channel (see chart below) remains intact here. However, the pair is showing the first signs of consolidation following the repeated rejections of levels under 1.05. Momentum indicators like the RSI show that the pair was deeply oversold, so some consolidation or correction at this stage seems likely, which will reduce the oversold conditions.

As can be seen, EURUSD is now trading in a bear flag pattern. Thus, the trend continuation to the downside would likely come when this flag breaks. For now, however,  support at its lower line around 1.05 is holding.

To the upside, the nearest resistance is toward the upper boundary of the flag, currently around 1.0650. The more important resistance, however, is located toward the previous lows at the 1.0750 - 1.08 zone.

We are entering a quiet period on the economic calendar following a busy previous week. The dollar retained strong levels, though it experienced a short-term correction after the Fed meeting on what seemed like a “buy the rumor sell the fact” behavior. The markets were already positioned for a very hawkish Fed, which Powell and company delivered, but Powell’s comment that an even larger 75bp hike is off the table for now was a reason for some profit-taking that triggered a retracement.

Nonetheless, it is clear to everyone that the Fed was not dovish at all, so this meeting doesn’t change the long-term bullish USD dynamics. The Fed is fully on course to tighten policy aggressively in the coming months, and at least two more 50bp rate hikes are likely in June and July (taking interest rates to 2% in summer already). Quantitative tightening will also commence on June 1 and speed up to a pace of 95 billion per month by September (that is almost as fast as QE was in the past). This Fed hawkishness should continue to support the US dollar during the coming weeks and months as no other central bank can match this level of hawkishness at the moment. In addition, the Covid lockdowns in China and the increasingly risk-averse global market environment are also a tailwind for the dollar at the moment.

However, there is scope for some consolidation near-term given the overbought conditions and notable USD appreciation already. The highlight of this week’s US economic calendar is the CPI report. Inflation is expected to start falling from this month (as base effects fade), so watch out for a possible surprise lower in the CPI report this Wednesday. In such a case, this could as well be the trigger for another leg of the USD correction, as US yields would also likely decline if the CPI prints below the forecasts (8.1% headline; 6.0% core). 

Several Fed speakers are also scheduled on the calendar, whose comments could also drive the dollar as they’ve done in recent months.

Traders didn’t have much to focus on the light EUR calendar last week, except for speeches by ECB Governing Council members. And there was interesting commentary from them, with the main takeaway being that ECB communication is increasingly favoring rate hikes this year and an end to extraordinary loose monetary policy. With inflation now running way above the ECB’s 2% target, it is becoming clear that they will start hiking interest rates this summer. This will lift the ECB’s interest rates from negative for the first time in 8 years.

ECB members last week also commented on the EUR exchange rate, suggesting further weakness is undesirable. While this initially triggered a bounce in the euro, it was short-lived in the end. The fact that none of this “hawkish” talk by the ECB is helping the currency is a signal that investors are worried about the larger picture and not so much about what the ECB will do.

Obviously, the war in Ukraine and the implications of the energy crisis are the main reason for this negative outlook, and both are likely to persist for a prolonged period. This should keep the euro under pressure over the coming months.

This week there are also some ECB speakers, including President Lagarde as well as Governing Council members Knot and De Cos.