- EUR/USD has been paring its gains related to Fed dovishness.
- A fading out of inflation concerns and optimism about Europe could push the pair back up.
- Wednesday's four-hour chart is pointing to fresh gains for the pair.
A necessary correction before the next move higher? That seems the most likely path for EUR/USD. The main dollar driver is speculation about the Federal Reserve's next moves – will the world's most powerful central bank print fewer greenbacks? A tapering of the Fed's bond-buying scheme could happen sooner if inflation rises too fast – that is the thinking in markets.
The ISM Manufacturing Purchasing Managers' Index showed a resilient US economy – and persistent price pressures. The inflation component stood at 88 in May, only marginally below the record high seen in April. This gauge joins other robust measures of prices and evidence of shortages.
However, the bank is not budging. Federal Reserve Governor Randal Quarles said that he does not think the Fed should use its tools to resolve supply shortages. His colleague Lael Brainard repeated the mantra that the economy has a long way to go, meaning that the bank should remain accommodative for a longer period.
Can we expect a change on Wednesday? Probably not. Atlanta Fed President Raphael Bostic and his colleague from Chicago Charles Evans are set to speak today and given their previous statement, they will likely remain dovish and weigh on the dollar.
US inflation? Only if the Fed says so, why every dollar rise could be a selling opportunity
In the meantime, there are reasons to be cheerful for the prospects of the old continent. Markit's preliminary eurozone PMIs for May showed robust growth while the Unemployment Rate surprised by remaining at 8% in April. Inflation also marginally exceeded expectations in the old continent.
On the vaccination front, Europe is accelerating its campaign while the jabbing pace in the US has slowed down markedly. COVID-19 cases have been falling sharply, nearly catching up with the low levels in the US:
Source: FT
All in all, the ingredients are in place for a fresh rise.
EUR/USD Technical Analysis
Euro/dollar continues benefiting from upside momentum on the four-hour chart and trades above the 100 and 200 simple moving averages. Bears may cheer the fact that the currency pair is dipping below the 50 SMA, but this drop seems short-lived.
Support awaits at the round 1.22 level, which capped EUR/USD last week. It is followed by 1.2175, which was a cushion last week, followed by 1.2160 and 1.2130.
Resistance is at 1.2255, which was the high point on Tuesday. It is followed by 1.2266, May peak – and an upside target for the pair. Next, 1.23 awaits bulls.
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