The EUR/USD pair ended the trading week at 1.0707, slightly below the opening price of 1.0723. However, if we look at the weekly chart, we can see that the pair has been actively declining over the past three weeks but essentially remained at the same level by the end of the previous week. The price briefly dipped to the 1.0636 area, reaching the 6th figure, but buyers quickly took control and extinguished the downward momentum. In fact, traders found themselves at a standstill, awaiting new developments.
The market is changing its coordinates
The southern marathon has come to an end due to objective reasons: U.S. lawmakers prevented a default on the national debt, leading to a noticeable weakening of risk-off sentiment in the markets. The safe-haven dollar, which had benefited from the situation over the past three weeks, also started to give up its positions. Towards the end of the trading week, when the fate of the bill on the debt ceiling suspension was finally decided, traders turned their attention to "classic" fundamental factors. The greenback found it increasingly challenging to maintain its positions, even despite relatively decent Nonfarm Payrolls. It is evident that dollar pairs have already begun preparing for the June meetings of the Federal Reserve and the European Central Bank, considering key releases through the lens of tightening monetary policy prospects. While in May, macro data were overshadowed by politics (the primary concern being the potential U.S. default), traders will now shift their attention to other categories.
The upcoming Fed meeting will take place on June 13-14, while the ECB meeting will be held on June 15. Considering the fact that 10 days prior to the Fed meeting, Committee members are required to observe a quiet period, EUR/USD traders will be left to their own devices in the near term and will have to independently assess the possible outcomes of the June meeting.
Overall, the market has already crystallized a general position, according to data from the CME FedWatch Tool. The probability of maintaining the status quo currently stands at 74.7%, while the probability of a 25-basis-point rate hike by the Fed is 25.3%. In other words, traders are nearly certain that the Fed will pause its rate hikes at the June meeting. As for the ECB, the consensus forecast indicates a 25-basis-point increase in interest rates. The major data of the upcoming week are unlikely to significantly alter the situation.
Monday to Friday: Key Events
On Monday, there is an expected speech by ECB President Christine Lagarde. She will present the semi-annual report to the European Parliament's Committee on Economic and Monetary Affairs. It is worth noting that last week, Lagarde expressed somewhat hawkish views despite the "red-tinted" report on European inflation growth. The ECB President, in particular, stated that she is uncertain about a sustainable slowdown in core inflation in the eurozone and promised further increases in key rates in this context. According to her, inflation is still too high "and will remain so for too long." Lagarde assured that the members of the regulatory body are determined to timely reduce it to the medium-term target level of 2%. It can be assumed that Lagarde will voice similar views within the walls of the European Parliament, thereby providing support to the common currency.
Also on Monday, the ISM Non-Manufacturing Purchasing Managers' Index (PMI) will be published in the United States. According to the forecasts of most experts, the indicator will show a slight growth in May, to 52.6 (after rising to 51.9 in April). It is worth recalling that the ISM Manufacturing PMI, published last week, was in the "red," declining to 46.9 (the indicator has been below the key 50-point mark for seven consecutive months).
On Tuesday, secondary data will be published (including retail sales volume in the eurozone and the IBD/TIPP Economic Optimism Index in the United States).
On Wednesday, the US trade balance data and consumer credit volume will be released. During the European session, ECB Executive Board member Fabio Panetta will speak.
On Thursday, we will learn the final estimate of Eurozone GDP growth for the first quarter. According to forecasts, the indicator will be revised downwards from 0.1% to 0.0% on a quarterly basis and from 1.3% to 1.2% on an annual basis.
During the US session on Thursday, the weekly initial jobless claims figure will be published. Over the past two weeks, the indicator has shown an uptrend, and this week, we also expect to see an increase to 240,000. Amid unexpected unemployment growth in May (to 3.7%), this fact will exert additional pressure on the greenback.
Finally, on Friday, ECB Vice President Luis de Guindos is expected to speak. Last week, he commented on the inflation growth data in the eurozone (which reflected a slowdown in the consumer price index). According to him, the published figures are "positive but still far from target levels." In this context, he added that the ECB still has a certain path to follow in terms of rate hikes. It can be assumed that following Guindos' speech on Friday, he will also voice hawkish views, providing support to the common currency.
Conclusions
After the saga of negotiations regarding averting a default in the United States, "classic" fundamental factors are back in the spotlight. Traders are preparing for the June meetings of the Fed and the ECB, assessing the prospects for further tightening of monetary policy parameters.
Although the probability of a Fed rate hike currently stands at only 25%, the suspense around the possible outcomes of the June meeting will persist until the last moment, as not all members of the Fed have supported the idea of maintaining the status quo. In particular, Cleveland Fed President Loretta Mester made hawkish comments, stating that there are no compelling reasons for a pause in rate hikes at this time. Dallas Fed President Robert Kaplan also stated that incoming data "support a rate increase at the next meeting." Doubts about a possible pause were voiced by Thomas Barkin, Raphael Bostic, and John Williams.
All of this indicates that EUR/USD traders (both sellers and buyers) are likely to exercise caution in the coming days. In such an uncertain environment, market participants are unlikely to risk heavily investing in the dollar or, conversely, getting rid of it. Therefore, we can assume that the pair will drift within a roughly 100-point price range, with the lower bound around 1.0640 (lower line of the Bollinger Bands indicator on the four-hour chart) and the upper bound around 1.0760 (upper line of the Bollinger Bands, coinciding with the upper boundary of the Kumo cloud on the same timeframe).
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