The EUR/USD pair is currently in the midst of a local uptrend; however, this rally is set within the context of a larger downtrend.
Recent drop in the value of the United States dollar can be attributed to speculation regarding a possible Fed reversal later this year, which has been fueled by weaker macroeconomic data. However, officials from the Federal Reserve have not confirmed this change.
At the same time, it appears that the European Central Bank (ECB) will likely reduce interest rates by 25 basis points (bps) at their subsequent decision-making meeting. Officials from the European Central Bank have been preparing the scene for this move.
The most important question is whether the European Central Bank will engage in a full-blown pivot or continue to take a wait-and-see approach, despite the fact that one cut is probably already priced in.
A continued widening of the policy gap?
Currency valuation is significantly influenced by the policies of central banks, particularly those pertaining to interest rates. It is possible for long-term trends in currency pairs to be triggered by divergences in monetary policy.
An excellent illustration of this is the USD/JPY exchange rate, which saw a sustained appreciation of the yen to multi-decade highs as a result of the Bank of Japan's dovish stance, which contrasted sharply with the hawkishness of the Federal Reserve.
Within the next few months, the EUR/USD pair might experience a situation that is comparable, albeit one that is less dramatic. It is possible that the EUR/USD exchange rate will decrease if the Federal Reserve decides to postpone its rate hike until the following year while the European Central Bank (ECB) reduces interest rates at this time.
EUR/USD: important data to keep an eye on this week
There is a packed macroeconomic calendar for the second half of the week, which is likely to increase the volatility of the EUR/USD exchange rate. Key data points from the United States, such as GDP and the preferred inflation gauge of the Federal Reserve, PCE, will be closely monitored by investors.
Currently, the market is paying close attention to both the GDP and inflation data. If the Gross Domestic Product (GDP) continues to surprise negatively, the Federal Reserve may decide to speed up its exit strategy in order to protect the economy from a severe recession.
High inflation, which has traditionally been considered an important indicator, should also not be ignored.
Meanwhile, additional inflation data is expected to be released on Friday in the Eurozone. If the numbers are in line with what the market anticipates, it is highly unlikely that they will have a significant impact on the decision that the European Central Bank will make the following week.
View from a technical perspective
In the time leading up to the release of the data, the EUR/USD chart reveals that the currency pair is continuing its ascent. The primary objective is still the supply zone that is located just above 1.09.
Pay close attention in order to identify any potential reversal of the broader correction. It is essential to prioritize not only the lower channel limits but also the critical support level, which is located at 1.08. It is possible that further declines will occur if this support is broken, with the first target lying at 1.0740 price.
Ultimately, the interplay of these economic indicators and central bank policies will dictate the future trajectory of the EUR/USD pair.
Market participants must stay informed and adaptable, ready to respond to the dynamic shifts in this pivotal currency pair. Furtermore, the path forward will be shaped by both immediate data releases and the strategic decisions of the Fed and ECB, underscoring the importance of close monitoring and agile response strategies in currency trading.