The EUR/USD pair maintained a firm and volatile trend during Monday's European session, trading around the 1.1640 level. The euro demonstrated relative resilience as market risk sentiment continued to improve and European Central Bank officials reiterated inflation warnings.
Yannis Stournaras, a member of the ECB's Governing Council and Governor of the Bank of Greece, stated that the situation in the Strait of Hormuz could have deeper implications for global inflation. He noted that the strait handles nearly 20% of global energy supply transportation. If transport disruptions persist, rising energy prices could further transmit into wages and the prices of goods and services.
Stournaras emphasized the necessity for the ECB to ensure inflation returns to its medium-term target of 2%. Markets remain highly attentive to the Middle East situation. Although negotiations between the U.S. and Iran have shown some progress, uncertainty persists regarding the restoration of Strait of Hormuz traffic.
Previously, market expectations suggested that the U.S. and Iran might be nearing an agreement, including the resumption of shipping through the Strait of Hormuz and a mitigation of energy supply risks. This expectation significantly improved market risk appetite and weakened demand for the U.S. dollar as a safe haven. However, ECB officials are concerned that even if geopolitical tensions gradually ease, the prior increase in energy prices could still generate a "second-round inflation effect" on the Eurozone economy.
The so-called "second-round inflation effect" primarily refers to rising energy prices not only increasing corporate costs but also potentially leading to wage increases and sustained rises in service prices, thereby creating longer-term inflationary pressures. The ECB's current primary concern is that the energy price surge could transition from a short-term shock to a long-term, structural inflation issue.
Recently, several ECB officials from the Eurozone have begun signaling a more hawkish stance. Markets perceive an increasing probability that the ECB will maintain high interest rates or even implement further hikes in the future. Although the ECB kept rates unchanged at its April meeting, internal discussions have already taken place regarding potential future rate increases. As energy price volatility intensifies and inflation risks re-emerge, markets are reassessing the future policy path of the ECB.
Concurrently, due to progress in U.S.-Iran negotiations, safe-haven demand for the U.S. dollar has noticeably cooled. The recent pullback of the U.S. Dollar Index to around 99.00 has further supported the rise in EUR/USD. Markets believe that if the U.S. and Iran ultimately reach an agreement and facilitate the normalization of traffic through the Strait of Hormuz, international oil prices could decline further. This would reduce global safe-haven demand and weaken the dollar's performance.
However, U.S. inflation remains elevated, and the Federal Reserve maintains a relatively hawkish stance in the near term. Current market expectations suggest the possibility of further Fed rate hikes within the year. Although the dollar has experienced a short-term correction, the high U.S. interest rate environment continues to constrain any rapid, significant appreciation of EUR/USD.
Furthermore, risks of slowing economic growth in the Eurozone persist. The sustained environment of high interest rates and high energy costs continues to pressure European manufacturing and consumer demand, indicating that the ECB's future policy space faces certain limitations.
From a technical perspective, the daily chart for EUR/USD maintains an overall firm and volatile structure. The pair recently regained a foothold above the 1.1600 level, indicating that overall bullish sentiment still holds an advantage. Key resistance on the daily chart lies in the 1.1680 to 1.1700 region. A subsequent break above this area could lead to a further test near 1.1750. On the downside, 1.1600 has formed a crucial short-term support zone, with further support located around 1.1550. Observing daily indicators, the MACD remains above the zero line, suggesting the medium-term trend is still biased towards the bulls. The RSI indicator is around 55, reflecting overall market momentum as neutral to slightly bullish.
However, if U.S. economic data continues to show strength and the Federal Reserve reinforces hawkish policy expectations, the dollar could regain support. Additionally, a renewed deterioration in the Middle East situation could also reignite safe-haven demand for the dollar.
Overall, the current movement of EUR/USD is primarily influenced by a combination of ECB hawkish expectations, the pullback in the Dollar Index, and shifts in global risk sentiment. Short-term market sentiment leans towards euro bulls, but future direction will require close monitoring of the Middle East situation, energy prices, and policy changes from the ECB and the Fed.
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