15.05.202323:39 Forex Analysis & Reviews: EUR/USD. US default, Fed and ECB rhetoric. Which card will be the main one in the deck

The euro rose at the start of the new week, but it may be at risk of falling to its lowest levels since the end of March in the near future. This could happen if the region's economic performance worsens investor interest in the single currency.

The EUR/USD rose from last week's lows on a rebound in risky assets such as stocks and commodities. But the euro remained volatile ahead of European growth data for the first quarter and U.S. retail sales data due out on Tuesday.

"The realignment of EUR/USD with bond spreads has run its course and hedge funds maintained their long position last week, so the profit-taking looks tactical and does not suggest a more fundamental shift is afoot," comment at Societe Generale.

"We can't ignore the jeopardy of a deeper pullback of course, especially if US retail sales come in strong tomorrow."

"Confluence of 100-DMA and the trendline going back to September 2022 near 1.0800/1.0730 is a crucial support zone. A break would hasten a retracement towards 1.05."

By the way, the euro recovered, ignoring an important report from Eurostat, which indicated a stronger decline in industrial production in March than expected. Industrial production in the euro zone fell by 4.1% by the end of the first quarter.

The immediate prospects in this direction look bleak. While the decline in energy prices is stimulating more energy-intensive sectors. Weak demand remains a problem in all directions.

Impact of new factors

Given that inflation rose from 6.9% to 7% last month, it is unlikely that disappointing growth in the first quarter will have a direct impact on ECB rate forecasts. However, this may temporarily affect traders' appetite for the euro.

Especially if similar indicators for China turn out to be lower than expected values, and April data on retail sales in the US later the same day will be positive.

Retail sales data is perhaps the main event in the economic calendar this week. The focus will also be on public appearances by several high-ranking Fed officials and increased market attention to political negotiations on the debt limit.

Exceeding the legislative debt limit in the US is an annual occurrence. This time, the situation is complicated by high political tension and the administration's loss of majority in Congress last year.

Legislators have until the end of the current month to reach an agreement before a technical default occurs, or an economically destructive government shutdown. It is still unclear what impact such events could have on the dollar and EUR/USD.

Speculators are betting on a rise in the EUR/USD pair, opening positions, which makes the euro vulnerable to a decline when they close. Commonwealth Bank of Australia strategists recommend paying attention to the downward support for EUR/USD at the 1.0727 level.

At Nomura, they continue to hope for a euro recovery in the next two weeks. By the end of June, the euro to dollar rate is expected to rise to the level of 1.1400.

At the moment, the euro has a positive sentiment due to expectations that the ECB will continue to tighten monetary policy in its efforts to combat inflation.

In addition, the eurozone GDP is expected to grow at a faster pace than previously expected. The European Commission now forecasts growth rates of 1.1% this year and 1.6% in 2024. Inflation will reach 5.8% in 2023 and 2.8% in 2024.

As for policy, market observers expect the ECB to gradually raise the deposit rate, potentially peaking around 3.7% by September. This would follow a cumulative increase of 375 bps since the middle of last year.

Some central bank politicians do not rule out the possibility of extending the interest rate hike timeline beyond previous expectations. This is necessary for effective management of inflationary pressure.