EUR/USD forecast: monthly low in place ahead of Fed and ECB?

EUR/USD Outlook

EUR/USD struggled to hold its ground after clearing the April 2022 high (1.1076), and the exchange rate is likely to face increased volatility in the days ahead the Federal Reserve and European Central Bank (ECB) are expected to implement higher interest rates.

EUR/USD forecast: monthly low in place ahead of Fed and ECB?

EUR/USD slipped to a fresh weekly low (1.0942) as the update to the Euro Area Consumer Price Index (CPI) showed the core rate of inflation unexpectedly narrowing to 5.6% in April from 5.7% per annum the month prior, and the Fed rate decision may keep the exchange rate under pressure as the central bank is anticipated to deliver another 25bp hike.

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Source: CME

According to the CME FedWatch Tool, market participants are pricing a greater than 90% probability for the Federa Open Market Committee (FOMC) to raise US interest rates to a fresh threshold of 5.00% to 5.25%, and a 25bp rate hike paired with a hawkish forward guidance may drag on EUR/USD as Chairman Jerome Powell and Co. keep the door to pursue a more restrictive policy.

However, a dovish Fed rate hike may produce headwinds for the Greenback as the central bank appears to be nearing the end of its hiking-cycle, and the ECB meeting may also sway the near-term outlook for EUR/USD as the Governing Council acknowledges that ‘inflation is projected to remain too high for too long.’

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The ECB is expected to increase Euro Area interest rates at a slower pace following the series of 50bp rate hikes from earlier this year, but President Christine Lagarde and Co. may continue to combat inflation over the coming months in order to achieve their one and only mandate for price stability.

In turn, the Euro may outperform its US counterpart in May as the Governing Council looks poised to further embark on its hiking-cycle, and a hawkish ECB rate hike may prop up EUR/USD as market participants brace for a more restrictive policy in the Euro Area.

With that said, EUR/USD is likely to face increased volatility as the FOMC and ECB are anticipated to implement higher interest rates, and it remains to be seen if the exchange rate will register the monthly low during the first week of May to largely mirror the price action from last month.

Euro Price Chart – EUR/USD Daily

Chart Prepared by David Song, Strategist; EUR/USD on TradingView

• EUR/USD consolidates after clearing the April 2022 high (1.1076), with a break/close below the 1.0880 (23.6% Fibonacci extension) to 1.0940 (50% Fibonacci retracement) region raising the scope for a move towards the 50-Day SMA (1.0813).
• Failure to hold above the moving average may lead to a test of the April low (1.0788), but EUR/USD may mirror the price action from April should it register the monthly low during the first week of May.
• A break above the April high (1.1096) along with a close above the 1.1070 (23.6% Fibonacci retracement) to 1.1090 (38.2% Fibonacci extension) area opens up the March 2022 high (1.1233), with the next region of interest coming in around 1.1270 (50% Fibonacci extension) to 1.1280 (61.8% Fibonacci retracement).

Additional Resources:

USD/JPY rate outlook vulnerable to dovish Fed rate hike

Gold price forecast: XAU/USD outlook hinges on Fed rate decision

--- Written by David Song, Strategist