What they were afraid of, they stumbled upon. The Eurozone has indeed fallen into a recession, which was feared in 2022 and boasted about in 2023, claiming that the decline would be avoided. The collapse in gas prices and the overshadowing of the energy crisis did not help the currency bloc. When the ECB aggressively tightens monetary policy, the recovery of the Chinese economy turns out to be less vigorous than expected, and Germany faces a labor shortage, the GDP will be under pressure. However, to investors' surprise, EUR/USD reacted to the decline in the eurozone's gross domestic product in the fourth and first quarters with a 0.1% growth.
Dynamics of the European economy
Buy the rumor, sell the fact. Fears of a potential economic downturn in the currency bloc were one of the drivers of the decline in EUR/USD. The expectation of death is worse than death itself. Therefore, the publication of eurozone GDP statistics triggered the closure of short positions and an increase in the quotes of the main currency pair, especially since buyers found another trump card.
After central banks in Australia and Canada unexpectedly raised their benchmark interest rates, rumors began circulating in the forex market that the Federal Reserve would follow suit. However, the dynamics of interest rate swaps indicate the opposite. Derivatives are 100% confident in a 25 basis point rate hike in federal funds in July. They point to -7 basis points in June, suggesting that borrowing costs will remain unchanged. Finally, a 25 basis point reduction from the peak of 5.5% is expected by the end of the year. In other words, a dovish pivot.
Market expectations for the Fed rate
Thus, investors do not believe that Washington will follow in the footsteps of Canberra and Ottawa. They still anticipate a pause in the process of tightening monetary policy in June. This circumstance weakens the position of the U.S. dollar.
However, it's one thing when speculators close shorts. It's another thing that can make them open long positions. So far, no such reasons are apparent. Perhaps the recession in the Eurozone will not have an impact on the ECB's worldview since it is about the past. Nevertheless, it is unlikely that the deposit rate will rise above 3.75%. And this "bullish" factor for the euro is already factored into the EUR/USD quotes.
In my opinion, only a significant slowdown in U.S. inflation in May, followed by dovish rhetoric from the Federal Reserve at the next meeting, will help the bulls on the main currency pair to break above 1.085. The inability to do so will be a sign of buyers' weakness and a reason to sell. In the meantime, it is most likely that EUR/USD will prefer consolidation until important events in the middle of the following week.
Technically, on the daily chart, the main currency pair is working on the previously mentioned 1-2-3 pattern. However, it is not advisable to get carried away with long positions formed from the 1.074 mark. A rebound from pivot points at 1.0765, 1.0805, and 1.0835 will be a basis for taking profits and shifting to shorts on EUR/USD.
