EUR/USD Forecast: Bulls await a more hawkish ECB, trading range breakout

The EUR/USD pair attracted some buying on Wednesday, albeit lacked follow-through and remained confined in a familiar trading range held over the past two-and-half weeks or so. The shared currency drew support from an upward revision of the Eurozone GDP, showing that the region's economy expanded by 0.6% QoQ in the first quarter as against 0.3% estimated previously. Apart from this, expectations for imminent interest rate hikes by the European Central Bank (ECB) offered some support to the major, though modest US dollar strength acted as a headwind.

Investors remain concerned that the global supply chain disruption caused by the Russia-Ukraine war might push consumer prices even higher. This continued fueling speculations that the Fed would tighten its monetary policy at a faster pace, which, in turn, triggered a fresh leg up in the US Treasury bond yields. This, along with the prevalent cautious mood, offered support to the safe-haven greenback. The market sentiment remains fragile amid worries that a more aggressive move by major central banks to control inflation could spark an economic slowdown.

The aforementioned diverging forces held back traders from placing aggressive directional bets around the EUR/USD pair and led to subdued/range-bound price moves. Market participants also preferred to wait on the sidelines ahead of the key central bank event risk - the highly-anticipated ECB monetary policy meeting on Thursday. The ECB is expected to take a hawkish stance and lay the groundwork for an interest rate hike in July. The prospect of a 50 bps rate hike has gathered steam following the recent data showing that inflation hit a record high in May.

Furthermore, the markets are currently betting on a 75 bps of tightening by September and a total of 130 bps by year-end, implying a jumbo rise at one of the four meetings after June. This raises the risk of disappointment if ECB President Christine Lagarde sticks to her previous stance for 25 bps rake hikes in July and September. Meanwhile, dovish members of the governing council remain wary of a sharp shift in policy amid expectations for inflation to cool. The positioning suggests that the euro could weaken if ECB fails to signal a 50 bps rate hike.

Technical outlook

From a technical perspective, nothing seems to have changed for the pair and the rangebound price moves point to indecision among traders over the next leg of a directional move. Meanwhile, the recent strong rebound from the YTD low stalled near the 50% Fibonacci retracement level of the 1.1185-1.0350 fall. The said barrier, around the 1.0775-1.0780 region, should act as a pivotal point, which if cleared might be seen as a fresh trigger for bullish traders. Some follow-through buying beyond the 1.0800 mark would reaffirm the constructive outlook and lift spot prices to the next relevant hurdle near the mid-1.0800s. The momentum could further get extended towards the 61.8% Fibo. level, around the 1.0880 zone en-route the 1.0900 round figure and 1.0935-1.0940 supply zone.

On the flip side, weakness below the 1.0700 mark is likely to find decent support near the 38.2% Fibo. level, around the 1.0670 region. This is followed by last week’s swing low, around the 1.0625 region, and the 1.0600 mark. Failure to defend the said support levels would prompt aggressive technical selling and darg the EUR/USD pair back towards the 23.6% Fibo. level, around the 1.0550-1.0545 area. Bears might eventually aim to challenge the 1.0500 psychological mark, which if broken would make the pair vulnerable to break below the 1.0400 mark and retest the YTD low, around mid-1.0300s touched in May.