EUR/USD Outlook: Bulls seem non-committed, remain at the mercy of USD price dynamics

The EUR/USD pair kicked off the new week on the backfoot in reaction to the risk of political gridlock in France after President Emmanuel Macron lost an absolute majority in a parliamentary election. The modest bearish gap down, however, was quickly bought into amid the emergence of fresh US dollar selling. Against the backdrop of the post-FOMC decline in the US Treasury bond yields, a generally positive tone around the equity markets turned out to be a key factor that undermined the safe-haven greenback. The shared currency drew additional support from the fact that the European Central Bank President Christine Lagarde reaffirmed plans to raise interest rates twice this summer.

During her testimony before the European Parliament, Lagarde said that the ECB plans to raise the policy rate by 25 bps next month and also left the door open for another hike at the September meeting. Furthermore, Lagarde defended the ECB’s decision, made at an emergency meeting last week, to accelerate work on a new policy tool to counter the recent surge in the borrowing costs for more vulnerable countries. Lagarde added that the fight against fragmentation risk is a precondition to the success of the monetary policy. It is worth mentioning that bond yields of highly indebted nations in the bloc like Italy have soared faster than those for more stable countries like Germany.

Adding to this, ECB Governing Council member Martins Kazaks said he would support a 25 bps rate hike in July and 50 bps in September. This further contributed to the EUR/USD pair's intraday bounce of over 70 pips from the daily low, through the uptick lacked bullish conviction amid relatively lighter trading volumes on the back of the US holiday. Meanwhile, expectations that the Fed would tighten its monetary policy at a faster pace to curb soaring inflation and hike again by 75 bps at its next meeting acted as a tailwind for the USD. This was seen as another factor that kept a lid on any meaningful gains for the major, which finally settled in the neutral territory around the 1.0500 psychological mark.

The EUR/USD pair held steady above the said handle through the Asian session on Tuesday and remains at the mercy of the USD price dynamics. There isn't any major market-moving macro data due for release from the Eurozone, while the US economic docket features Existing Home Sales. This, along with the US bond yields and the broader market risk sentiment, might influence the USD demand and provide some impetus to the major. The focus, however, will remain on Fed Chair Jerome Powell's testimony on Wednesday and Thursday. Apart from this, the release of the flash PMI prints from the Eurozone and the US on Thursday should assist traders to determine the near-term trajectory for the pair.

Technical outlook

From a technical perspective, the 1.0540-1.0545 region now seems to have emerged as an immediate strong hurdle. This is followed by last week's swing high, around the 1.0600 round-figure mark and the 50-day SMA, near the 1.0620 region. Sustained strength beyond the latter would validate the formation of a double-bottom near the 1.0360-1.0350 area. This, in turn, would set the stage for a further near-term appreciating move and lift the EUR/USD pair beyond the 1.0650 horizontal support breakpoint, now turned resistance. The momentum could further get extended and allow bulls to aim back to reclaim the 1.0700 mark.

On the flip side, immediate support is pegged near the 1.0470 area, below which spot prices could slide back to the 1.0400 round figure en-route the YTD low, around mid-1.0300s set in May and retested last week. Some follow-through selling would be seen as a fresh trigger for bearish traders and make the EUR/USD pair vulnerable to challenging the 1.0300 mark.