EUR/USD recovers from Warsh selloff, focuses on ECB rate decision

FUNDAMENTAL OVERVIEW

USD:

Since the NFP release, the US dollar has been declining. That move was driven by market attention shifting to the CPI rather than the NFP, as traders follow the data the central bank prioritizes. At present, the Federal Reserve is concentrating on inflation.

The US PPI report is due today and could move markets, but the more important event is tomorrow's US CPI, which comes before the FOMC decision next week.

A CPI reading that is soft or in line with expectations would probably weaken the dollar, given that Fed's Waller has said he would not consider a rate hike unless the CPI is hot. On the other hand, a higher-than-expected core monthly inflation figure would likely cause a rally as the market reprices hawkishly.

The market is also watching the Iran conflict and rising oil prices, which increase inflation risks. Consequently, the reaction to the CPI may not be straightforward, and traders should consider using a smaller position size.

EUR:

For the euro, the ECB is anticipated to raise interest rates by 25 basis points at its meeting today, taking the policy rate to 2.50%. The central bank is forecast to maintain a data-dependent, meeting-by-meeting stance, and Lagarde is not expected to explicitly promise another hike.

The macroeconomic projections will also be released, with growth estimates likely raised and near-term inflation possibly lowered. The market prices in about 48 basis points of tightening by the end of the year and 85 basis points by end-2027. That implies traders anticipate at least three ECB rate increases by December 2027, including today's.

This much tightening is already priced into the curve. Hence, the euro faces downside risks because the ECB would have to be more hawkish than markets expect to cause a hawkish repricing and lift the euro.

If the ECB delivers a 25 bps hike followed by a cautious Lagarde, the market would see it as more dovish, which would weigh on the euro as rate hike bets are reduced. Conversely, if Lagarde stresses that the ECB is ready to keep hiking if inflation risks remain, the euro could gain because that would indicate a greater willingness for further tightening.

EURUSD TECHNICAL ANALYSIS – DAILY TIMEFRAME

After bouncing from the 1.1560 support, EURUSD has been gradually moving higher. Buyers are targeting the 1.1711 high, and a break above that would pave the way for a move to 1.1850. Sellers are expected to appear around those levels with a stop above to bet on a decline to 1.14.

EURUSD TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

The swing high near 1.1661 is crucial as it marked the point of Warsh's hawkish speech. Sellers are likely to step in around that swing high with a stop above, aiming for a drop to 1.1560. Buyers want to see a break higher to add to bullish positions targeting 1.1711.

EURUSD TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

An upward trendline on the hourly chart defines the bullish momentum. On a pullback, buyers are expected to support the trendline with a stop below, aiming to continue to new highs. Sellers are looking for a breakdown to add to short positions targeting 1.1560. The red lines indicate the average daily range for today.

UPCOMING CATALYSTS

Today's events include the ECB rate decision, US PPI, and jobless claims. The week ends with the US CPI tomorrow.