EUR/USD Outlook: Poised to test 1.0775 confluence hurdle after Lagarde’s hawkish comments

The EUR/USD pair witnessed an aggressive short-covering move on Monday and rallied to a fresh monthly peak in reaction to hawkish comments by the European Central Bank (ECB) policymakers. In fact, ECB President Christina Lagarde said in a blog post that the central bank was likely to lift the euro area deposit rate out of the negative territory by the end of September. She added that the ECB could raise interest rates further if it saw inflation stabilizing at 2%. Separately, ECB Governing Council member Francois Villeroy de Galhau noted that the deal is probably done because there is a growing consensus on a July rate hike.

Apart from this, broad-based US dollar weakness was seen as another factor that contributed to the pair's strong move up. Given that a 50 bps Fed rate hike move is already priced in, the risk-on impulse weighed heavily on the safe-haven buck. Hopes that loosening of COVID-19 lockdowns in China would boost the global economy lifted investors' confidence. This was evident from a generally positive tone around the equity markets, which, in turn, dragged the USD to its lowest level since April 26. That said, the worsening global economic outlook kept a lid on the optimistic move and extended some support to the greenback and capped the major.

Investors remain worried that a more aggressive move by major central banks to curb soaring inflation could pose challenges to global economic growth. Adding to this, the Russia-Ukraine war and the latest COVID-19 outbreak in China have been fueling recession fears. This, along with expectations that the Fed would need to take more drastic action to bring inflation under control, helped revive the USD demand during the Asian session on Tuesday. The EUR/USD pair struggled to capitalize on the overnight strong move up and met with a fresh supply in the vicinity of the 1.0700 mark. Traders now look forward to the release of the flash PMI prints from the Eurozone and the US.

Apart from this, a scheduled speech by Fed Chair Jerome Powell and ECB President Christina Lagarde should produce some meaningful trading opportunities around the EUR/USD pair. The focus, however, will remain on the release of the FOMC monetary policy meeting minutes, due on Wednesday. Market participants will look for clues about the possibility of a jumbo 75 bps rate hike by the Fed in June. This will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the major.

Technical outlook

From a technical perspective, the overnight broke through the 38.2% Fibonacci retracement level of the 1.1185-1.0350 downfall could be seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have just started moving into positive territory and support prospects for additional gains. Hence, some follow-through strength, towards testing the 1.0770-1.0775 confluence resistance, now looks like a distinct possibility. The said barrier comprises the 50-day SMA and the 50% Fibo. level, which if cleared decisively should pave the way for an extension of the recent strong recovery move from the YTD low touched earlier this month.

On the flip side, the 1.0640-1.0630 zone now seems to protect the immediate downside ahead of the 1.0600 round-figure mark, below which the pair could fall to the 23.6% Fibo. level, around mid-1.0500s. Failure to defend the latter would shift the bias back in favour of bearish traders and make the EUR/USD pair vulnerable. Spot prices could then accelerate the fall towards the next relevant support, around the 1.0470 region, before eventually dropping to test sub-1.0400 levels in the near term.