EUR/USD Short-Term Uptrend Channel Remains Intact Amid ECB Brutality

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Recent comments from ECB policymakers suggest that the “spread” between interest rates on both sides of the Atlantic will be smaller than expected…

As my colleague Joe Perry noted earlier this week, EUR/USD had the opportunity to rally to 1-month highs in the 1.0760 area after ECB President Lagarde opened the door. interest rate hikes in July. We have now seen this move play out as expected, leaving traders wondering: Where will the world’s most traded currency pair go next?

From a fundamental perspective, expectations for interest rate hikes from the Federal Reserve have already been heavily discounted, with markets essentially discounting two more rate hikes of 50 basis points (0.50%) followed by increases of 25 basis points (0.25%) for the rest of the year. If inflation readings continue to moderate in the coming months, the central bank could even pause the rate hike cycle for a meeting or two in the fourth quarter of this year or the first quarter of 2023.

In other words, While the Fed will undoubtedly raise interest rates more than the ECB this year, recent comments from ECB policymakers suggest that the “spread” between interest rates on both sides of the Atlantic will be wider. lower than expected. As the market is still looking forward, we saw an impressive EUR/USD rally to start the week as traders recalibrated to a new, smaller interest rate differential scenario for the second. semester of this year and beyond.

Looking ahead, this afternoon’s FOMC minutes will pose potential event risk for EUR/USD and the broader greenback, although recent economic data and in-depth FOMC commentary over the past two weeks may make the minutes less impactful than usual. At the end of the day, the Fed’s near-term plans seem relatively settled, so future EUR/USD moves are more likely to come from the European continent.

EUR/USD Technical Outlook

Looking at the 4-hour chart, EUR/USD has seen a short-term pullback over the past 24 hours, but the pair remains well within its two-week ascending channel. Looking forward, traders only have only began to digest the significant acceleration in ECB tightening intentions this week, so the baseline expectation is that the pair will remain within its bullish channel for the time being. Bulls will look for a retest of the key 1.0750-70 area at lows, with a break above that area opening the door for a continuation to the mid-April highs around the next 1 handle. ,0900.

Source: StoneX, TradingView

At this point, it would take a break below the bullish support in the 1.0630 area to clear the short-term bullish bias and return the short-term outlook to neutral.

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