High energy prices and ECB rate hike bets weigh on the euro as growth outlook worsens

FUNDAMENTAL
OVERVIEW

USD:

The US dollar strengthened across
the board on safe haven demand this week after the US-Iran conflict erupted
over the weekend. The main driver though was the market’s realisation that rate
cuts might not come as soon as expected.

In fact, higher oil prices
will eventually put upward pressure on inflation and the US data this week
clearly showed that the economy has been re-accelerating since the start of the
year and not slowing down further.

Traders pared back their
rate cut bets this week with the total easing by year-end now seen around 36
bps vs 58 bps on Friday. Today, we have the US NFP report and all the jobs data
we got up until now suggests that we will likely get good data.

EUR:

On the EUR side, the
US-Iran conflict led to a surge in energy prices which are feeding into higher
inflation expectations. This led the market to price in a rate hike from the ECB
this year. ECB policymakers are cautioning against reacting too fast to Middle
East events as they could end up being transitory like in the past.

This conflict is already
much longer than those we experienced in the past few years. Trump mentioned
that it could last 4 weeks and, although initially it looked like one of his
usual exaggerations, the risk is that he’s really considering going on for such
a long time. This is likely to weigh on growth and a rate hike would make
things even worse.

EURUSD TECHNICAL
ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can
see that EURUSD stalled at the key 1.1575
level. This is where the buyers are stepping in with a defined risk below the
swing level to position for a rally into the downward trendline. The sellers,
on the other hand, will look for breaks to increase the bearish bets into the
1.14 handle next.

EURUSD TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, there’s
not much we can add here as the pair got stuck in a consolidation at the 1.1575
level. If the price bounces and breaks above the 1.1655 high, we can expect the
buyers to increase the bullish bets into the trendline.

EURUSD TECHNICAL ANALYSIS –
1 HOUR TIMEFRAME

On the 1 hour chart, we can see more clearly the rangebound price action at
the 1.1575 level as traders await new catalysts to push the price below the key
level. We have the NFP report today which might boost the USD further on strong
data. The red lines define the average daily range for today.

UPCOMING CATALYSTS

Today we conclude the week with the US NFP report but continue to keep an eye
on the US-Iran headlines as that’s what the market is focused on right now.