EUR/USD drifts below 1.1700 as the US Dollar bounces on cautions trading
- EUR/USD retraces Monday's gains and drops back below 1.1700.
- The US Dollar regains lost ground as investors shift their focus to the Fed's meeting.
- Oil prices are ticking higher as Trump dislikes Iran's peace proposal.
The Euro (EUR) pares gains against the US Dollar (USD) on Tuesday, returning to levels sub-1.1700 at the time of writing, following a rejection at 1.1755 on Monday. The safe-haven US Dollar has built up some momentum, amid the stalled Middle East conflict and with central banks’ decisions on tap.
The Federal Reserve (Fed) will most likely leave interest rates unchanged in the 3.50%-3.75% range at what should be the last meeting of Jerome Powell as the bank’s Chairman. Senator Thom Tillis lifted his block on the nomination of former Governor Kevin Warsh as the next chairman, which lays the ground for Powell's replacement in May.
On Thursday, the focus will shift to the European Central Bank (ECB). ECB officials have already shown their willingness to hike interest rates this year, but they might prefer to wait for a more complete assessment of the economic impact of Iran’s war. Investors are expecting a hawkish hold this week, pointing to a rate hike in June or July.
The conflict in the Middle East, meanwhile, remains stalled. A report by Reuters citing a US official affirms that US President Donald Trump did not like Iran’s latest peace proposal, as it does not address the nuclear issue. This keeps a high degree of uncertainty with the Strait of Hormuz closed, and Brent Oil price well above $100, adding pressure on crude-importing Eurozone economies and weighing on the Euro.
Technical Analysis: Bears will meet strong support below 1.1675
EUR/USD recovery attempts were rejected on Monday at a former trendline support, now turned into resistance, and the break of the 1.1700 level on Tuesday has confirmed the bearish bias.
Technical indicators are also pointing lower. The Relative Strength Index (RSI) on the 4-hour chart hovers in the high-30s, hinting at increasing bearish momentum, and the Moving Average Convergence Divergence (MACD) line is attempting to cross below the Signal line, which is another bearish sign.
Bears, however, are likely to be challenged in the area between the April 12 and 13 lows, around 1.1675 and the April 9 low, at 1.1650. Further down, the next target is April's bottom, between 1.1505 and 1.1525.
On the topside, the session high at 1.1727, and the confluence of the reverse trendline with the April 22 high, near 1.1760, are likely to keep the bearish structure in place. A rebound beyond these levels would bring the April 20 highs, near 1.1790, into focus.
(The technical analysis of this story was written with the help of an AI tool.)
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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