• Central banks revived stagflation fears and warned about persistently high inflation.
  • The US and Germany will report fresh Consumer Price Index figures next week.
  • The EUR/USD corrective advance is not enough to convince buyers.

Quite a volatile week ended with EUR/USD trading around 1.0560, not far from the year-to-date low of 1.0470. The pair corrected part of its previous weekly losses but overall retains the bearish stance.

Blame it on central banks

Central banks took centre stage this week, as overheating inflation keeps running out of control, and monetary tightening has become the new norm. The Reserve Bank of Australia was the first, hiking its cash rate by 25 bps. “The economy has proven to be resilient, and inflation has picked up more quickly, and to a higher level, than was expected,” the accompanying statement reads.

On Wednesday, it was the turn of the US Federal Reserve, probably the most anticipated event of the week. As widely expected, the central bank raised the Fed Funds rate by 50 bps to a range of 0.75% to 1% and announced the bank would start reducing the balance sheet on June 1. Policymakers said they would begin with a $47.5 billion cap on the monthly runoff, rising to $95 billion after three months.

Financial markets showed little reaction to the announcement, which was pretty much in line with expectations. However, hell broke loose with Chair Jerome Powell's press conference. Among other things, Powell dismissed potential 75 bps hikes, and investors cheered the “less aggressive” stance. Wall Street rallied, dragging alongside high-yielding currencies to the detriment of the greenback. The EUR/USD pair reached a weekly high of 1.0641 in the aftermath of the announcement, then plummeted to a weekly low of 1.0492 early on Thursday.

The catalyst for the dollar’s recovery was the Bank of England.  The BOE’s Monetary Policy Committee unanimously agreed to raise rates by 25 bps to 1%. However, the central bank downwardly revised its growth estimates for this year and the next one. Additionally, Governor Andrew Bailey warned that the UK is at risk of slipping into recession before the year-end, adding that inflation could go above 10% in the upcoming months.

Reality check for market participants

Bailey’s reality check extended to US shores as the American economy faces stagflation, that is, slowing economic growth coupled with rising inflation. Wall Street plummeted on Thursday, and the greenback regained its poise.

Also, market participants realized that the Fed may not have been more aggressive than anticipated, but it is indeed the one applying the toughest measures. European Central Bank officials have mentioned July as the possible date on which they would discuss a rate hike,  but by that moment, the Fed would have likely pulled the trigger again by another 50 bps. In the long run, the central banks’ imbalance will keep favoring the American currency.

Another huge factor weighing on the shared currency is the Eastern European crisis. Russia is not backing down on its determination to dominate Ukraine and keeps attacking the country. The European Union is struggling to replace Russian energy, and despite announcing the sixth pack of sanctions, it’s still unable to agree on a full oil embargo. The European Commission has proposed an oil ban exemption for Hungary and Slovakia through 2024. The EUR has little chance of rallying against its American rival as long as this menace persists.

What is data telling?

Economic growth is still on the right path but slowing. The US ISM Manufacturing PMI printed at 55.4 in April, down from 57.1 in March. The services indexes came in at 54.6, also missing expectations and below its previous reading.

On Friday, the country published the April Nonfarm Payroll report, showing 428K new jobs were added in the month. The Unemployment Rate was 3.6%, slightly higher than the estimate of 3.5%. Additionally, Average Hourly Earnings were confirmed at 5.5% YoY, adding to inflationary pressures and being a major headache for policymakers.

Across the pond, things are no better. German and EU Retail Sales fell in March, missing the market’s expectations, while the S&P Global Services PMIs suffered downward revisions. Also, German Factory Orders plummeted by 3.1% YoY in March.

The upcoming week will be quieter in terms of first-tier events, with the main focus on inflation. Germany is expected to confirm the April Consumer Price Index at 7.8% YoY, while the US is foreseen to report that the annual CPI in the same month decreased to 8.4%. The core CPI is expected at 6.0%, down from the previous 6.5%.

EUR/USD technical outlook

The weekly chart for EUR/USD shows that the bearish trend is alive and kicking, with the latest advance seen just as corrective. The pair is currently trading over 500 pips below a firmly bearish 20 SMA, which continues heading south below the longer ones. Technical indicators, in the meantime, have barely pared their slides, holding within oversold readings.

The daily chart indicates that the pair entered a corrective phase after plummeting to a multi-year low of 1.0470, as it has spent the last few days seesawing inside a roughly 150-pip range. Technical indicators have corrected extreme oversold conditions and keep advancing, although without strength and within negative levels, hinting at absent buying interest. The 20 SMA has accelerated its decline, now acting as dynamic resistance at around 1.0710, while the longer moving averages maintain their bearish slopes far above the shorter one.

The weekly top at 1.0641 is the immediate resistance level, followed by the 1.0700 figure. A more sustainable corrective advance could take place if the pair stabilizes above the latter, aiming for an approach to the 1.0800 price zone. The main support level is the aforementioned year’s low, with a break below it exposing 1.0339, the multi-year low posted in January 2017.

EUR/USD sentiment poll

According to the FXStreet Forecast Poll, the EUR/USD pair is expected to continue falling next week, as 78% of the polled experts are bearish, with the pair is seen on average at 1.0510. The sentiment turns bullish in the monthly and quarterly perspectives, seen on average at 1.0683 in the first with 52% of bulls among experts. The number of bears shrinks to 19% in the quarterly view, and the pair is seen recovering towards the 1.0700 region.

The Overview chart indicates that bears are still in full control. The weekly moving average heads firmly lower, with most targets around or below the current level. The monthly moving average also presents downward strength, while the quarterly one maintains its downward slope. However, in the wider perspective, most targets accumulate in the 1.08/1.10 region, suggesting that market players are looking for at least a corrective advance. 

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