EUR/USD Technical Levels and Event Risks
We see the EUR/USD pair facing resistance around 1.0850 as traders position for major economic events. The European Central Bank’s recent dovish pivot has capped the euro’s strength, while the market braces for the crucial US Consumer Price Index (CPI) data due this Wednesday. All eyes will then turn to the Federal Reserve’s interest rate decision next week.
Our view is that the policy divergence between the major central banks is the primary driver right now. The ECB has signaled a potential rate cut by September, responding to slowing Eurozone inflation which fell to 2.4% in the latest reading. This contrasts sharply with the Federal Reserve, which is still grappling with persistent US inflation running above its 2% target.
Monetary Policy Divergence and Geopolitical Backdrop
A hotter-than-expected US CPI number this week could easily push the dollar higher, as it would increase the odds of another Fed rate hike in July. Looking at historical data, we saw a similar situation in late 2024 when a surprise inflation uptick caused a sharp repricing of Fed expectations and a multi-week rally in the dollar. Current CME FedWatch tool probabilities suggest the market is pricing in a 45% chance of a hike next month, a figure that will be very sensitive to this week’s data.
We are also factoring in the broader risk environment, as any signs of rising geopolitical tension tend to boost the US Dollar’s safe-haven appeal. Recent friction over international trade agreements and instability in the South China Sea are keeping investors on edge. This backdrop of uncertainty could provide underlying support for the dollar, acting as a headwind for the EUR/USD pair in the coming weeks.
EUR/USD firmed to around 1.1545 in early European trading on Tuesday as markets positioned for a more hawkish European Central Bank (ECB). Attention is split between US Consumer Price Index (CPI) figures due on Wednesday and the ECB’s interest rate decision on Thursday, with the latter expected to set the near-term tone for the euro.
The ECB is expected to lift its key rate at the June meeting for the first time in almost three years, with a 25 basis point rise seen as the base case. The move would make the ECB the first among its peers to tighten policy after energy prices rose following the conflict in the Middle East. President Christine Lagarde is scheduled to deliver the policy statement and hold a press conference, which will be monitored for further indications of the ECB’s stance. Separately, US President Donald Trump said he may put forward a proposal on the Iran agreement within days. Tension remains elevated after Israeli Prime Minister Benjamin Netanyahu said the war against Iran and Hezbollah has not yet ended, though he said both are weaker than ever; further escalation could underpin the US Dollar as a safe-haven.
