The EUR/USD currency pair is experiencing a downward trend, primarily driven by the increasing likelihood of Federal Reserve rate hikes and soaring Treasury yields. This trend is further exacerbated by the prolonged US-Iran tensions and the closure of the Strait of Hormuz, which have heightened market impatience. Traders are now pricing in a 50% chance of a rate hike by year-end, with the US dollar benefiting from these inflation concerns and geopolitical risks.
The US-Iran stalemate remains unresolved, with President Trump threatening new strikes if Iran doesn't make a deal, while Iran counters with warnings of military surprises. This dynamic has contributed to the US dollar's resilience, as traders anticipate potential economic and political instability. The Federal Reserve's gradual shift away from easing policies, with policymakers discussing rate hike possibilities, further supports the US dollar's strength.
In the short term, a resolution to the Strait of Hormuz closure and falling oil prices could temporarily weaken the US dollar. However, if the Strait remains closed for an extended period and oil prices remain elevated, the risk of the Fed hiking rates increases. This scenario could lead to a hawkish surprise, especially with persistent high inflation and resilient US economic data.
On the EUR side, a June rate hike is highly anticipated, with an 83% chance priced in by the market. The European Central Bank (ECB) is expected to tighten monetary policy by 70 basis points by year-end, almost equivalent to three rate hikes. This makes it challenging for the euro to rally solely based on interest rate expectations, as the ECB is unlikely to outpace market pricing. The recent economic data highlights a concerning combination of weaker economic activity and stronger price pressures, prompting the ECB to consider a cautious approach and potentially deliver an insurance hike in June.
Technical analysis of the EUR/USD pair on various timeframes reveals a bearish sentiment. On the daily chart, the pair has broken below the key 1.1660 support zone, retesting it and continuing lower. A further pullback into the support-turned-resistance area could trigger a sell-off, with the risk defined above it. Buyers, on the other hand, await a break above the 1.1750 level to initiate a rally into the downward trendline. The 4-hour chart shows a downward trendline, with sellers likely to continue pushing the pair into new lows. Buyers will look for a break above the resistance to extend the pullback. The 1-hour chart provides a similar outlook, with sellers having a favorable risk-reward setup around the trendline or resistance, while buyers wait for upside breaks to enter new highs.
Upcoming catalysts include the FOMC meeting minutes, Eurozone PMIs, US Jobless Claims figures, and US Flash PMIs. These events will provide further insights into the economic landscape and potentially influence market sentiment, impacting the EUR/USD pair's trajectory.
