The EUR/USD pair saw a slight rebound on Wednesday, helped by a decline in US Treasury yields, which capped further gains for the US dollar. The euro, in contrast, benefited from new inflation data out of the eurozone, raising hopes that the European Central Bank (ECB) might consider raising interest rates sooner than expected.
As of the latest updates, the dollar was trading around 1.1632, having dipped to an intraday low of about 1.1582, the lowest point since April 7. The dollar index (DXY), which compares the dollar to six major currencies, is sitting close to a six-week high at around 99.36.
According to Eurostat, inflation in the eurozone has remained above the ECB’s 2% target for two consecutive months. The harmonized index of consumer prices (HICP) rose from 2.6% in March to 3% in April, primarily driven by increasing energy costs. However, the core HICP saw a slight drop from 2.3% the previous year to 2.2%.
Reuters reported that the ECB raising interest rates in June is now considered “almost certain,” with sources indicating a shift toward a more adverse inflation outlook.
Current market expectations indicate an 86% likelihood that the ECB will increase rates by 25 basis points to 2.25% at its upcoming June 11 meeting, based on a report from BHH Marketview. The report further explains that while raising rates in a low-growth, high-inflation environment isn’t entirely positive for the euro, it still exerts a dampening effect.
At the same time, the hawkish stance from the Federal Reserve and ongoing uncertainties surrounding US-Iran negotiations are lending support to the US dollar, limiting any significant appreciation of the EUR/USD pair. From a technical standpoint, bearish momentum indicates that sellers are likely to maintain control in the near term.
Technical analysis:
Currently, on the daily chart, EUR/USD is trading below both the 50-day simple moving average (SMA) and the 100-day SMA, which further reinforces a bearish outlook. The pair is hovering just above a horizontal support level near 1.1600, while the Relative Strength Index (RSI) sits around 43. The negative Moving Average Convergence Divergence (MACD) line, alongside a slightly negative histogram, suggests there’s still some downside momentum, though it’s not extremely intense.
Looking upwards, immediate resistance is seen at the 50-day SMA near 1.1649, followed by the 100-day SMA around 1.1701. There’s also a horizontal barrier at 1.1800, creating a more extensive supply zone. On the downside, the initial support level is at 1.1600; if this level is breached, it could expose the next key support around 1.1500, where buyers might step in to slow any further decline.
ECB FAQ
The European Central Bank (ECB), based in Frankfurt, Germany, acts as the reserve bank for the euro area. Its primary role is to set interest rates and manage monetary policy. The ECB aims to maintain price stability, ideally keeping inflation around 2%. To achieve this, it raises or lowers interest rates. Generally, higher interest rates contribute to a stronger euro, while lower rates have the opposite effect. The ECB Governing Council makes monetary policy decisions during its eight annual meetings, involving heads of eurozone national banks and key ECB members, including President Christine Lagarde.
In extreme situations, the ECB can implement a policy known as quantitative easing. In this process, the ECB creates euros to purchase assets—usually government and corporate bonds—from banks and financial institutions. This approach typically leads to a weaker euro. Quantitative easing serves as a measure of last resort when price stability cannot be achieved solely through interest rate reductions. The ECB activated this strategy during the 2009-2011 financial crisis, again in 2015 when inflation was persistently low, and during the COVID-19 pandemic.
Quantitative tightening (QT) is essentially the reverse of QE, occurring after economic recovery is in sight and inflation starts rising. In QE, the ECB buys government and corporate bonds from financial institutions, aiming to boost liquidity. In QT, however, the ECB halts new bond purchases and refrains from reinvesting the matured principal of bonds already owned. This usually has a positive impact on the euro.
