EURUSD Capped by Descending Trend Line Resistance

Since the EURUSD peaked at 1.2348 in January 2021, it has lost more than 14.5% and is currently hovering around 1.053. Against the backdrop of a risk-off market, geopolitical uncertainties, soaring inflation and raising interest rates environment, the US Dollar has taken the driver’s seat and dominates against the major currencies. The US Dollar Index (DXY), which gauges the strength of the greenback against a basket of rival currencies, now resides around the highest levels in 20 years, at 104.3.

Fed steps up to tame soaring inflation

Following the release of U.S. Consumer Price Index (CPI) data for May that scored a 40-year high at 8.6%, the US Federal Reserve hiked the interest rates by 75 basis points, the steepest rate hike since 1994. This also marked the third interest rate increase in 2022 by the Fed following a 25 bps and 50 bps in March and May respectively. Fed Chair Jerome Powell acknowledged that while the 75 bps increase is an unusually large one, and he does not expect moves of this size to be common. However, he expects the July meeting to see an increase of 50 or 70 bps but decisions will be made “meeting by meeting” to see progress in flattening the inflation.

The subsequent monetary policy decisions will hinge on the US inflation data, any CPI data that is higher than the May record of 8.6% will exert immense pressure on the Fed to tame the inflation by imposing steeper rate hikes, which would boost the US Dollar against other currencies.

ECB plans to raise rates in July

In the face of worsening inflation, the European Central Bank (ECB) expressed their stance to introduce a rate hike as soon as July. On Monday, ECB President Christine Lagarde testified before the Committee on Economic and Monetary Affairs of the European Parliament and said that they intend to raise key rates by 25 basis points at the July policy meeting. She highlighted that price rises are becoming more widespread across sectors and measures of underlying inflation have risen further. Moreover, they expect to raise the key ECB interest rates again in September.

Technical Analysis

The EURUSD remains largely in a downtrend and a descending trend line resistance stretching back to February this year is serving as resistance for the pair. The Relative Strength Index (RSI) resides in the bearish zone below 50 but a bullish divergence between the prices and RSI reading suggests a possible move higher from current prices.

Looking ahead, we project the EURUSD to test resistance line 1 (R1) at 1.064, which coincides with the aforementioned dynamic resistance. Beyond R1, the subsequent resistance levels lie at 1.077 (R2) and 1.093 (R3). In terms of support, we have identified the levels to be 1.045 (S1) and 1.035 (S2).

Tuesday, June 21

USD – Chicago Fed National Activity Index (May)

Wednesday, June 22

EUR – ECB’s De Guindos speech, ECB’s Elderson speech, Consumer Confidence (Jun)

USD – Fed’s Chair Powell testifies

Thursday, June 23

EUR – EU leaders summit, German S&P Global/BME Composite PMI(Jun), German S&P Global/BME Manufacturing PMI(Jun), EU S&P Global Composite PMI(Jun)

USD – Initial Jobless Claims (Jun 17), Initial Jobless Claims 4-week average(Jun 17), S&P Global Composite PMI(Jun), S&P Global Manufacturing PMI(Jun), S&P Global Services PMI(Jun), Fed’s Chair Powell testifies

Friday, June 24

USD – Bank Stress Test Info, Michigan Consumer Sentiment Index(Jun), New Home Sales (MoM)(May)

EUR – EU leaders summit, German IFO – Current Assessment (Jun), ECB’s De Guindos speech