EUR/USD Retreats as US Dollar Rebounds - Fundamental View

The EUR/USD currency pair experienced a retreat from its intraday high as the US Dollar managed to pare back some of its recent losses. The European Central Bank (ECB) President, Christine Lagarde, attempted to defend a hawkish bias but acknowledged that a significant portion of the journey toward curbing inflation had already been covered. Meanwhile, Federal Reserve Chair Jerome Powell referred to the banking crisis as a means to alleviate pressure on the bank to raise interest rates, and Neel Kashkari from the Fed sounded defensive.

The sentiment surrounding the US-China relationship, as well as discussions on the US debt ceiling by President Joe Biden, influenced the recent market sentiment and the performance of the US Dollar. As a result, the EUR/USD pair extended its pullback from the intraday high, dropping to 1.0810 as the European session began on Monday. The cautious optimism regarding US-China ties and hopes of avoiding a US default contributed to the Euro's rebound. However, mixed comments from ECB President Christine Lagarde weighed on the major currency pair.

President Joe Biden, following the Group of Seven (G7) summit in Japan, expressed his expectation of improved ties with China in the near future, following a dispute over an alleged spy balloon that strained relations earlier this year. However, the banning of Micron Technology products by China raised concerns about ongoing tensions between the US and China. President Biden also expressed optimism about his discussion with Republican House Speaker Kevin McCarthy, stating that they would continue their talks on Monday.

During an interview on the Buitenhof TV show aired on Sunday, ECB President Christine Lagarde stated that significant progress had been made in taming inflation and bringing it back to the target set by the bank.

On the other hand, Federal Reserve Chair Jerome Powell acknowledged inflation concerns but mentioned that the recent banking crisis, which resulted in tighter credit standards, has relieved some pressure to raise interest rates. Nevertheless, market expectations for a 0.25% rate hike by the Fed in June have increased, and calls for a rate cut in 2023 have diminished due to positive US economic data from the previous week and hawkish comments from Fed officials.

From a technical standpoint, the price of the EUR/USD pair is currently within a bearish channel. Last week, the value experienced a rebound at the 50% Fibonacci area as predicted, but it appears to be continuing its downward trend. Our stance remains strongly bearish.

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Expectations for more interest rate hikes by the European Central Bank (ECB) are supporting the shared currency. Money markets are factoring in two additional 25 basis point rate hikes, driven by recent remarks from ECB President Christine Lagarde, who emphasized the ongoing effort to bring inflation back to target. However, concerns about slowing global growth and bullish sentiment surrounding the US Dollar are limiting the upside potential for the EUR/USD pair, at least for now.

The flash version of the Eurozone PMI indicated a slight slowdown in overall business activity, with the services industry losing some shine and the manufacturing sector experiencing a deeper downturn in May. This follows softer Chinese macro data, which raised recession fears as the world's second-largest economy underperformed. These factors, combined with the lack of progress in talks to raise the US debt ceiling, continue to weigh on investor sentiment and could benefit the safe-haven US Dollar. Debt ceiling negotiations between President Joe Biden and congressional Republicans have not yielded an agreement.

Furthermore, the possibility of further rate hikes by the Federal Reserve (Fed) supports the US Dollar bulls and limits gains in the EUR/USD pair. Despite Fed Chair Jerome Powell's less hawkish remarks, investors remain convinced that the central bank will maintain higher interest rates for an extended period. Several Fed officials adopting a more hawkish stance this week have led to market expectations of a 25 basis point rate increase in June.

Elevated US Treasury bond yields, along with positive US macro data, contribute to the potential for some US Dollar dip-buying. The S&P Global's Composite PMI suggests a strengthening pace of business activity in the US private sector in early May, while sales of new US single-family homes reached a 13-month high in April. However, it is advisable to await strong follow-through buying before anticipating further intraday gains in the EUR/USD pair.

Traders may exercise caution and stay on the sidelines ahead of the release of the Federal Open Market Committee (FOMC) minutes later during the US session on Wednesday. These minutes will be closely analyzed for insights into the Fed's future policy decisions, which will influence the near-term dynamics of the US Dollar and provide impetus to the EUR/USD pair. Additionally, the release of the German Ifo Business Climate report presents short-term trading opportunities for traders interested in the major currency pair.

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