EURUSD retreats to levels last seen in January, even as expectations for an ECB rate increase rise, with the US Dollar strengthening sharply

Market Fundamentals Overview

US Dollar (USD):

The US dollar experienced a broad surge yesterday, fueled by increased demand for safe-haven assets following the escalation of tensions between the US and Iran over the weekend. However, a significant factor behind the dollar’s strength was the market’s reassessment of the timing for potential rate cuts, which now appear less imminent than previously anticipated.

Rising oil prices are expected to contribute to higher inflation, and the latest ISM Manufacturing PMI report underscored that the market may have been overly optimistic about the economy’s outlook. For the second month in a row, the data exceeded expectations, dispelling the notion that previous strong readings were anomalies.

Additionally, the prices index climbed to its highest point since 2022, signaling persistent inflationary pressures. As a result, traders have scaled back their expectations for rate cuts, now projecting approximately 45 basis points of easing by year-end, down from 58 basis points anticipated last Friday.

Euro (EUR):

While the macroeconomic backdrop for the euro remains unchanged, the US-Iran conflict has triggered a spike in energy prices, which is feeding into higher inflation forecasts. Today’s Eurozone CPI release came in above expectations, and together with elevated energy costs, has led to increased speculation about potential rate hikes.

Markets are now assigning a 21% probability to a rate increase by June, and a 50% chance by year-end. Nevertheless, European Central Bank officials are urging caution, warning against overreacting to developments in the Middle East, which could prove temporary as seen in previous episodes.

EURUSD Daily Chart Analysis

The daily chart for EURUSD shows the pair nearing a significant support level at 1.1575. This area may attract buyers looking to enter with limited downside risk, aiming for a rebound toward the 1.18 region. Conversely, sellers will be watching for a breakdown below this level to target further declines toward 1.14.

EURUSD 4-Hour Chart Insights

On the 4-hour timeframe, the primary focus remains on the 1.1575 swing level. Additional details require a closer look at shorter timeframes, as this is the nearest key area of interest.

EURUSD 1-Hour Chart Overview

The 1-hour chart highlights a descending trendline that is reinforcing the current bearish momentum. Should the price retrace, sellers are likely to defend this trendline, managing risk above it while seeking new lows. Buyers, meanwhile, will be watching for a breakout above the trendline to pursue gains toward the 1.1740 resistance. The red lines on the chart indicate today’s average daily range.

Key Events Ahead

• Tomorrow: Watch for the US ADP employment report and ISM Services PMI.
• Thursday: US Jobless Claims data will be released.
• Friday: The week concludes with the US Non-Farm Payrolls (NFP) report.

However, these economic releases may have a muted impact this week, given the ongoing geopolitical tensions between the US and Iran.