The EUR/USD exchange rate remained mostly flat on Wednesday, hovering around 1.1425, just below its monthly high of 1.1495, as traders awaited two major catalysts: forward guidance from European Central Bank (ECB) officials and the highly anticipated US consumer inflation data.
These events are set to play a pivotal role in determining the short-term direction of this major currency pair, which accounts for the largest share of global forex transactions. This article from the Servelius team offers a thorough explanation of the matter.
ECB Guidance: Rate Cuts Under Scrutiny
In recent sessions, a slew of statements from ECB policymakers has drawn investor attention. Notably, Boris Vujic, the Governor of the Croatian National Bank, suggested that the ECB should refrain from cutting rates again before September.
According to Vujic, the ECB is now in a favorable position after delivering a series of eight interest rate cuts, reducing the deposit facility rate from 4% to 2% over the past year. His tone echoed a broader sentiment within the ECB that the current rate-cutting cycle may be nearing its conclusion.
Christine Lagarde, the ECB President, has also hinted that the scope for additional cuts is limited unless fresh macroeconomic data signals a further downturn in eurozone inflation or growth. These statements signal a cautious approach by the ECB, prioritizing data-dependence over a pre-set easing path.
The ECB’s policy divergence from the Federal Reserve (Fed) is widening. The Fed has opted to hold rates steady in the 4.25% to 4.50% range throughout 2025, emphasizing its commitment to taming persistent inflation, which remains above the 2% target.
US Inflation in Focus: A Critical Catalyst
The upcoming release of US Consumer Price Index (CPI) data is expected to inject significant volatility into the EUR/USD pair. Economists forecast that the headline CPI rose from 2.3% in April to 2.5% in May, while core CPI, which strips out volatile food and energy prices, is expected to increase from 2.8% to 2.9%.
A hotter-than-expected inflation print would likely reinforce the Fed’s resolve to maintain its restrictive stance, thereby strengthening the US dollar and pushing EUR/USD lower. Conversely, any downside surprise in inflation could revive speculation of a Fed rate cut as early as July or September, providing a tailwind to the euro.
With interest rate differentials being a key driver of currency valuations, traders are poised to react sharply to any deviation from expectations in the inflation data.
EUR/USD Technical Analysis: Bullish Momentum Holds
From a technical perspective, EUR/USD has shown a solid bullish structure in recent weeks. The pair continues to trade above its 50-period and 100-period moving averages on the 12-hour chart, suggesting strong underlying support. The bullish crossover that occurred earlier this month has maintained momentum, signaling that buyers remain in control.
Key support levels to watch include 1.1213, which marks the swing high from August and September 2024, now acting as a major floor. On the upside, the next resistance level stands at 1.1573, the high from April 21. A successful breakout above this barrier could open the door for further gains toward the psychological level of 1.1600.
Momentum indicators further support a bullish bias. The MACD (Moving Average Convergence Divergence) remains above the zero line, and no signs of bearish divergence have formed yet. RSI (Relative Strength Index) is still below overbought territory, giving room for further upside before a correction is warranted.
Conclusion: Positioning for Volatility
The EUR/USD currency pair is approaching a critical juncture. As macroeconomic and monetary policy narratives evolve on both sides of the Atlantic, traders should brace for heightened volatility and potential sharp breakouts from current levels. With the pair trading just below 1.1495, a breakout above 1.1573 could reinforce bullish sentiment, while a drop below 1.1350 may invalidate the current bullish bias.
Given the delicate balance between economic fundamentals, inflationary pressures, and central bank actions, short-term trades should incorporate tight risk management and be guided by key technical levels and macro releases. Whether you are a trend follower or a range trader, the next moves in EUR/USD will offer ample opportunity for both speculation and hedging.
Stay updated and be ready to adjust your strategies as new data rolls in, the battle between the euro and the dollar is far from over.
