19.05.202315:01 Forex Analysis & Reviews: Euro trims some losses

The euro's slide was so relentless that a pause was bound to happen sooner or later. Euro bulls found the strength to hold onto support at 1.076 and attack. Germany's blue-chip DAX index hitting a new record high supported the euro. Thanks to the German and euro area economies avoiding a recession, gas prices falling, and China recovering from the pandemic, the stock market is posing gains. However, will this be enough to stop a pullback in the main currency pair?

Dynamics of Germany's DAX

Morgan Stanley believes this is not enough. The company points out fears about lower demand for loans in the euro area. In this case, inflation will slow down faster than expected, and recession risks will appear again. As a result, Christine Lagarde and her colleagues will no longer need to lift the deposit rate to 3.75%. Its peak will be lower. This will dampen demand for EUR/USD and trigger a sell-off towards 1.03.

This factor will come as a surprise and could deal a serious blow to the regional currency. In the meantime, the main currency pair is losing ground as the probability that the Fed will ease its monetary policy in September has dropped to 27%, while the probability of a rate hike in June has increased to 40%.

Fed Rate Probabilities for June

Several FOMC members have spoken in favor of the latter scenario. In particular, Dallas Fed President Lorie Logan noted that the case for pausing interest rate increases at the Fed's June meeting isn't yet clear. The slowdown in inflation in recent months has been mainly due to lower energy prices. The labor market remains strong, so there are no guarantees that inflation will confidently move towards the 2% target.

St. Louis Federal Reserve Bank President James Bullard assumes that the disinflation process is slower than desired. Therefore, it would be a wise decision for the regulator to play it safe and raise borrowing costs by another 25 basis points to 5.5%. According to his colleague, Atlanta Fed President Raphael Bostic, if the rate is not lifted in June, it will be raised in July. Everything will depend on statistics, he added.

Strong macroeconomic indicators and the Fed's hawkish rhetoric are an explosive mixture. Against this background, the EUR/USD pair collapsed to its lowest level since late March. However, gains in European equity markets and expectations that Jerome Powell would be less aggressive in his speech on May 19 allowed the euro to return above $1.08.

From a technical point of view, the EUR/USD pair managed to find a bottom on the daily chart thanks to the pivot point of 1.076. Thus, the target level for short positions from 1.101 was achieved. To resume an uptrend, the market needs strong signals, including the test of moving averages. As long as there are no such signals, the pair will most likely keep pulling back. So, the best way to make a profit is to sell the euro on rebounds from the resistance levels of 1.0835 and 1.087.