Once again, bears tried to push the EUR/USD pair lower at the start of the week, but the euro is steadily rebounding. It is being supported by diverging monetary policies. The market is awaiting signals from the ECB about interest rate hikes. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Donald Trump's approval ratings are falling.
- The "Kevin Warsh factor" is weighing on the dollar.
- The market is awaiting signals from the ECB regarding a rate hike.
- Short trades on the EUR/USD pair can be opened on a rebound from 1.173 and 1.176.
Weekly Euro Fundamental Forecast
The third gap at the start of the week in a row — it's been a while since we've seen anything like this. However, this time the EUR/USD pair closed the gap much faster than in the previous two instances. Investors are shifting their focus from geopolitics to central bank meetings, taking note of record-breaking US stock indices, and keeping the "Warsh factor" in mind.
Another assassination attempt on Donald Trump, along with Iran's reluctance to participate in negotiations in Pakistan — where one of Tehran's key officials was visiting — boosted demand for the US dollar as a safe-haven asset, leading to a price gap forming at the start of the week in EUR/USD quotes.
However, the euro recovered fairly quickly. Whenever Donald Trump's political ratings decline, extraordinary events seem to occur that help them edge higher again.
Approval Ratings of US Presidents
Source: Bloomberg.
So far, Donald Trump has successfully achieved his goals even if that means shelving the investigation into Jerome Powell, sacrificing the small for the sake of a major victory. Isn't that the essence of Donald Trump's strategy? As a result, by the end of April, Kevin Warsh’s nomination will most likely be confirmed by Congress. Starting May 15, he will serve as acting Fed chair.
Although investors thought that Warsh came across as a hawk in his testimony before the Senate Banking Committee, that is not actually the case. According to the nominee, inflation is moving in the right direction, which means there are grounds for lowering rates. Bloomberg analysts forecast two Fed easing moves—in October and March—and an ECB tightening in June. This divergence is driving the rally in the EUR/USD pair.
Forecasts for ECB Deposit Rate
Source: Bloomberg.
The FOMC meeting in April will most likely be Jerome Powell's last as Fed chair. Investors do not expect any drastic decisions from the US central bank. In contrast, the ECB is expected to keep the deposit rate at its current level of 2% and signal a rate hike in June. Expectations of hawkish rhetoric are boosting EUR/USD quotes.
As for the geopolitical landscape, all wars eventually come to an end. The current ceasefire is widely seen as a step toward peace, and markets perceive the risks of escalation as low. If that weren't the case, US stock indices would not be reaching new all-time highs. Against this backdrop, the euro appears to be strongly supported.
Weekly EURUSD Trading Plan
As a result, investors have shifted their focus to upcoming central bank meetings. They have decided to postpone their assessment of how the conflict in the Middle East will affect the global, US, and European economies. Meanwhile, the levels of 1.173 and 1.176 are acting as key resistance levels for the EUR/USD pair. Short positions can be opened on a rebound from these levels. However, if the price pierces these resistance levels, long positions can be considered.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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