EUR/USD and a Return to $1.1050 in the Hands of the ECB

It is a relatively quiet day ahead for the EUR/USD. Finalized Italian inflation numbers for March will be in focus.

However, barring downward revisions to prelim numbers, the stats should have a limited impact on the EUR/USD. The markets are considering a 25-basis point and a 50-basis point May interest rate hike. Core inflation appears to be the focal point, with elevated core inflation likely to force another 50-basis point interest rate hike.

On Friday, ECB Executive Board Member Pierre Wunsch had this to say,

“I think May will be about 25 or 50 basis points. If there’s another upside surprise in core inflation and the lending survey doesn’t look too bad, we might have to do 50. If there is a positive surprise in core, then perhaps 25 is more appropriate.”

Wunsch added,

“Given that wage dynamics will be incompatible with the 2% inflation target for years and real rates are still low, I don’t see any quick reversal of policy once we reach the terminal rate.”

In contrast, the markets are betting on a 25-basis point Fed interest rate hike in May, leaving monetary policy divergence in favor of the EUR.

With inflation in focus, investors should monitor ECB commentary today. ECB President Christine Lagarde and Executive Board members Elizabeth McCaul and Anneli Tuonminen will deliver speeches.

EUR/USD Price Action

This morning, the EUR/USD was down 0.13% to $1.09787. A mixed start to the day saw the EUR/USD rise to an early high of $1.09945 before falling to a low of $1.09616.

Technical Indicators

The EUR/USD needs to move through the $1.1014 pivot to target the First Major Resistance Level (R1) at $1.1055. A return to $1.10 would signal a bullish session. However, the EUR/USD needs hawkish ECB commentary to support a breakout session.

In the case of an extended rally, the bulls will likely test resistance at the Friday high of $1.10758 but fall short of the Second Major Resistance Level (R2) at $1.1117. The Third Major Resistance Level (R3) sits at $1.1221.

Failure to move through the pivot would leave the First Major Support Level (S1) at $1.0952 in play. However, barring an ECB-fueled sell-off, the EUR/USD pair should avoid sub-$1.09. The Second Major Support Level (S2) at $1.0910 should limit the downside. The Third Major Support Level (S3) sits at $1.0807.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The EUR/USD sits above the 50-day EMA ($1.09509). The 50-day EMA pulled further away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above S1 ($1.0952) and the 50-day EMA ($1.09509) would support a breakout from R1 ($1.1055) to give the bulls a run at the Friday high of $1.10758 and R2 ($1.1117). However, a fall through S1 ($1.0952) and the 50-day EMA ($1.09509) would bring S2 ($1.0910) into view. A fall through the 50-day EMA would send a bearish signal.

The US Session

Looking ahead to the US session, it is a quiet day on the US economic calendar.

New York Empire State Manufacturing Index figures for April will be in focus. Better-than-expected numbers would ease immediate recession fears and support the dollar.

However, investors should monitor Fed chatter on monetary policy and the US economy. We expect increased sensitivity to FOMC member commentary as the markets respond to guidance beyond May.