Home EUR/USD Outlook: Investors Price in ECB/Fed Divergence

EUR/USD Outlook: Investors Price in ECB/Fed Divergence

  • Markets are expecting more ECB rate hikes.
  • Deposits at First Republic Bank in the US fell overnight, highlighting crisis risks.
  • Investors are pricing in Fed rate cuts as bank instability continues.

Today’s EUR/USD outlook is bullish. According to ECB board member Isabel Schnabel, a rate increase of 50 basis points is not out of the question. It will rely on data, particularly inflation data, due two days before the May meeting.

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Francois Villeroy de Galhau, a French ECB policymaker, appeared to hold a different perspective. He called for additional raises to be modest in size and number in an interview with Le Figaro. However, markets have concentrated on the fact that still more hikes are anticipated.

According to futures prices, there is a roughly 2/3 chance of an ECB rate hike of 25bps and a 1/3 possibility of a higher rate hike of 50bps.

According to Bank of Singapore currency strategist Moh Siong Sim, the market isn’t fully reflecting that yet. However, if the ECB does move to 50, it will strengthen the euro.

As a reminder that stability risks have not completely subsided, there was news of falling deposits at First Republic Bank in the US overnight. It caused traders to raise their expectations that the Fed would rapidly switch from rising to cutting interest rates.

According to Fed funds futures, there is an 88% chance that rates will go up next week and drop by 50 basis points by year’s end.

In fairly light trade on Monday, the dollar dropped to a level not seen in more than a week. Investors continued to price in Fed rate cuts this year.

EUR/USD key events today

Investors expect key data from the US, including the building permits report, the CB consumer confidence report, and the new home sales report.

EUR/USD technical outlook: Buyers stalled by 1.1075

EUR/USD technical outlook
EUR/USD technical outlook chart

In the 4-hour chart, EUR/USD is bullish. The price trades over the 30-SMA with the RSI above 50, supporting the bullish bias. However, bears are currently retracing the recent bullish move. Bears came when the price was about to retest the 1.1075 resistance level. 

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This pullback will likely pause at the 30-SMA support before the bulls return to retest the 1.1075 resistance. The bullish bias will, however, change if the price breaks below the SMA and fails to make a higher high above 1.1075.

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Saqib Iqbal

Saqib Iqbal

Saqib Iqbal is a market analyst, prop fund trader and mentor, serving the industry with his analysis and educational content since 2011. The author has great exposure to different financial markets and institutions. He's well-known for his day trading reviews and multiple timeframe analysis.