The single currency is performing precisely as the macroeconomic conditions indicated it would this week. The EUR/USD pair is currently trading at 1.1742 during late European hours, slightly below the weekly resistance level of 1.1755 and close to the 1.1800 mark, which has been the target for bulls since the bounce from Thursday’s low of 1.1655. Earlier in the Asian session, the pair demonstrated strength near 1.1735, remaining comfortably above the 20-period EMA at 1.1702 and approaching the 50.0% Fibonacci retracement at 1.1745. The bid reflects a comprehensive approach grounded in fundamental factors: a hawkish stance maintained by the European Central Bank on Thursday, elevated inflation levels in the Eurozone, a potential second round of yen intervention by Japanese authorities that significantly impacted the U.S. Dollar Index during the thin trading of May Day, and a U.S. Q1 GDP print that came in weaker than expected at 2.0% annualized, compared to the 2.3% consensus forecast. The Greenback is facing challenges, while the Euro is gaining momentum, and the technical indicators are shifting clearly in favor of the bulls. The inquiry at hand is not if EUR/USD surpasses 1.1755 — rather, it focuses on the clarity of that break and the subsequent movement that follows. The catalyst for Friday’s movement in EUR/USD was not European data; rather, it stemmed from a sharp decline in USD/JPY during the early European session, where the pair fell nearly 200 pips in mere seconds, likely indicating a second intervention by Japanese authorities within two days. The yen surpassed the 160 mark earlier this week, leading to intervention from Tokyo, and the subsequent action on Friday occurred at the 156-handle level. The impact of that intervention was felt throughout all significant dollar pairs.
The Greenback experienced significant declines across the board. EUR/USD transitioned from moderate losses to a new upward movement within minutes. GBP/USD advanced beyond 1.3600, reaching new three-month peaks. The DXY currently stands around 98.00, constrained beneath a descending trendline at 99.00 and exhibiting a distinct pattern of lower highs following a significant rejection wick at 99.30. The recent yen-intervention action had a more significant impact on the Euro on Friday than any economic data release or central bank announcement could achieve. The situation revealed the fragility of the dollar bid when capital seeking geopolitical safety is compelled to explore other currency options. The core narrative surrounding the Euro revolves around a decisive shift towards a more aggressive hawkish stance from the European Central Bank. Thursday’s policy decision resulted in a “hawkish hold” — rates were maintained at their current levels, yet there was clear communication indicating that an increase may be considered in the near future. Bundesbank President and ECB committee member Joachim Nagel reaffirmed on Friday that the baseline scenario now involves a more restrictive monetary policy, clearly indicating the potential for a rate hike in June. The recent remarks have led to a significant shift in market pricing. The current futures indicate a 75% likelihood of the ECB increasing rates in June, marking a significant shift from the expectations held merely two weeks prior. Eurozone inflation exceeded expectations, delivering the necessary data for the hawks, positioning the ECB as one of the most hawkish G10 central banks as we approach Q2 — a stark contrast to the divergence trade at the beginning of the year. The structural pivot stands as the primary catalyst for the Euro’s strength relative to the Dollar, and it shows no signs of diminishing.
This week, the Federal Reserve maintained the policy rate at 3.50%-3.75%, yet the level of dissent was the highest seen in a generation. Three policymakers — Beth Hammack from Cleveland, Neel Kashkari from Minneapolis, and one additional dissenter — opposed the dovish framing in the post-meeting statement. Some readings indicate that the dissent count may be as high as four, marking the largest divergence within the FOMC since 1992. Their argument suggests that indicating a cut as the next step is unsuitable considering the prevailing inflation environment, with PCE rising to 3.5% year-over-year and core PCE recorded at 3.2%. The likelihood of a June cut stands at a mere 5.1%, while 94.9% is aligned with no change. What accounts for the Dollar’s weakness despite the Fed maintaining a restrictive stance? The ECB has demonstrated a more aggressive stance compared to the Fed. The convergence trade has taken an unfavorable turn for DXY bulls — both central banks are currently in restrictive modes, yet the ECB is indicating a move towards tightening, while the Fed appears to be maintaining the status quo at best. This scenario perfectly illustrates the potential for Euro strength, aligning precisely with the current market signals. The U.S. preliminary Q1 GDP print registered at 2.0% annualized, falling short of the 2.3% consensus and contributing to further challenges for the dollar narrative. The deceleration in growth isn’t disastrous, yet it sufficiently diminishes the momentum of any “U.S. exceptionalism” strategy that had been supporting the Greenback during the first quarter. The ISM Manufacturing PMI for April registered at 52.7, marking the fourth consecutive month of expansion. Although this figure fell slightly short of the 53.0 consensus, the overall headline was eclipsed by the underlying developments. The Prices Paid sub-index increased by 6.3 points to reach 84.6, marking the highest level since April 2022, driven by tariff costs and the surge in energy prices due to wartime conditions. The Employment Index decreased by 2.3 points, now standing at 46.4, indicating a further deepening of contraction. The combination of slowing growth, rising input costs, and decreasing employment is a clear indicator of stagflation. This scenario typically leads to the Dollar underperforming, while safe havens like gold and the Euro tend to appreciate in value.
The technical posture is positive but not yet explosive. EUR/USD at 1.1742 is positioned above the 20-period EMA at 1.1702, situated between two significant Fibonacci retracement levels of the latest swing, and just beneath the 50.0% retracement at 1.1745. The 4-hour RSI at 60 indicates bullish momentum, as it has not yet signaled overbought conditions. Additionally, the widening green MACD histogram supports the potential for further upside. The pair has remained largely confined within a 100-pip range, with support consistently maintaining above 1.1650 and upward movements facing resistance beneath 1.1755. Bulls require a decisive move above 1.1755 — the high from April 27 — to validate that the bearish corrective phase from the 1.1850 peaks has concluded. The next level to watch is the April 20 high near 1.1790, which serves as a critical test, followed by the April peak just below 1.1850. The extended target is positioned at 1.1825, aligning with the 61.8% Fibonacci retracement of the most recent swing, while additional resistance levels are identified at 1.1938 and 1.2082. On the downside, the immediate support level is the 20-period EMA at 1.1702, followed by the 38.2% Fibonacci retracement at 1.1666. A more significant decline would reveal the 23.6% retracement at 1.1567, while the cycle low around 1.1408 serves as the ultimate structural support level. The 1.1670-1.1645 cluster represents the critical support zone that must be maintained for the bullish outlook to stay valid. The Dollar Index is experiencing a movement that mirrors the EUR/USD breakout. The DXY remains confined around 98.00, facing challenges in regaining momentum following yet another rejection at the descending trendline resistance close to 99.00. The price movement is establishing a distinct trend of lower highs, which strengthens the bearish framework. The 50-day EMA has reversed and is currently serving as overhead resistance, while the price stays beneath the 200 EMA — both technical indicators suggest a persistent downside bias. The rejection wick at 99.30 from earlier this week serves as a clear supply signal, while the RSI on the DXY has dipped below its midline and is on a downward trajectory, indicating a decline in bullish momentum. Initial support is positioned at 97.80, while the subsequent downside target is 97.20. A clean move above 99.00 is required to invalidate the bearish setup. Until then, the most favorable trajectory for the Dollar appears to be downward, which inherently suggests an upward movement for EUR/USD.
GBP/USD is performing in alignment with the expectations of the dollar-weakness strategy, breaking through the 1.3580 resistance and advancing beyond 1.3605, with momentum continuing to strengthen. The RSI on Cable is currently above 60, indicating genuine momentum while remaining clear of overbought conditions. Additionally, the price is consistently maintaining its position above both the 50 EMA and the 200 EMA. The upcoming resistance levels are 1.3650 followed by 1.3720, while structural support is positioned at 1.3500. The strength of the Sterling is bolstering the overarching narrative of Dollar weakness — when Cable, EUR/USD, and AUD are all rising in tandem against the Dollar, the primary factor at play is weakness on the Dollar side, rather than any unique strength in a specific counter-currency. This dynamic is favorable for the Euro continuation trade, as it indicates that the demand against the Dollar is unlikely to diminish rapidly. The primary structural concern for the Euro that merits attention is the energy import dynamic. Brent crude is currently priced between $107 and $113 per barrel, having reached a four-year peak exceeding $126 earlier this week. The Strait of Hormuz has now been under blockade for three months, with no viable strategy in place for its reopening. WTI crude is currently priced at $102.04, reflecting a decline of 2.88%. This movement follows Iran’s new response via Pakistani intermediaries, offering short-term relief; however, the underlying structural risk premium continues to be factored in. For the Eurozone, a significant energy importer, persistent oil prices exceeding $100 pose a notable challenge to the trade balance and the medium-term outlook for the Euro. The present strength is influenced by the divergence in ECB policy and the weakness of the dollar. However, should oil prices remain above $110 for a prolonged period, the ongoing import-cost burden will likely impact the Euro through the current account channel. This is a risk associated with Q3 rather than Q2, but it remains important to monitor.
Data indicates that net long Euro positions are on the rise — traders are strategically increasing their bullish exposure. Retail data indicates that approximately 55% of accounts are positioned long on EUR/USD, consistent with the recent upward trend. Risk reversal indicators indicate a modest premium for Euro puts, reflecting institutional interest in downside hedging despite the ongoing bid. This suggests a healthy positioning rather than signaling a contrarian warning. The divergence in analyst perspectives is significant. Jane Foley at Rabobank observes a positive broader trend, anticipating a move toward 1.1800 in the upcoming weeks. Kathy Lien at BK Asset Management holds a contrasting view, describing the Euro rally as overextended and anticipating a pullback to 1.1650 prior to any significant upward movement, referencing the stronger performance of the U.S. economy compared to the Eurozone. Both perspectives hold value. The disciplined approach involves adhering to the technical levels: maintain long positions above 1.1700, setting a stop at 1.1670, with targets at 1.1800 and 1.1850; a short bias is only warranted upon a confirmed break below 1.1645, accompanied by momentum confirmation.