Picture yourself as an experienced trader, fingers poised over the keyboard, eyes fixed on the flickering screen. The EUR/USD chart moves like a dancer—sometimes gracefully ascending, sometimes plunging sharply—each fluctuation testing your judgment and nerve. Yesterday, when U.S. core inflation data came in below expectations, conventional wisdom suggested the dollar would weaken. Instead, markets staged a dramatic reversal, with the dollar surging and EUR/USD erasing its gains.
Confused? Wondering what really happened behind the scenes? Let's analyze this phenomenon, uncover the truth hidden beneath the data, and identify clues about EUR/USD's future trajectory.
Act I: The Dollar's Unexpected Rebound
In currency markets, there are no certainties—only probabilities. While weaker-than-expected inflation typically pressures the dollar (as it suggests the Federal Reserve might slow rate hikes or even cut rates sooner), markets are complex, with multiple factors influencing exchange rates. The dollar's counterintuitive rise resembles a "Rashomon effect," with various interpretations possible.
1. Geopolitical "Black Swan": Risk Aversion Intensifies
Recent geopolitical tensions have resurfaced like an unexpected "black swan." With renewed warnings from former U.S. President Donald Trump toward Iran, Middle Eastern instability has escalated. Nervous investors have flocked to safe havens—and the dollar, as the world's primary reserve currency, has benefited from this flight to safety.
2. Fed Rate-Cut Expectations: Markets Remain Cautious
Despite the soft inflation print, market expectations for Fed rate cuts haven't shifted dramatically. Traders still anticipate about 54 basis points of cuts by year-end—barely changed from 52 basis points before the CPI release. This suggests markets believe the Fed won't pivot abruptly based on one data point, maintaining its hawkish stance if needed.
3. Supreme Court Uncertainty: Markets Await Tariff Ruling
Beyond economics and geopolitics, traders are watching the U.S. Supreme Court's pending decision on Trump-era tariffs. A ruling against the tariffs could boost risk appetite (weakening the dollar), while upholding them might have limited impact as markets have largely priced this in.
4. Technical Factors: Profit-Taking and Dip-Buying
After EUR/USD breached key resistance at 1.17, some traders likely took profits—selling euros and buying dollars. Meanwhile, technical analysts viewing the dollar's dip as temporary may have bought the bounce, amplifying the move.
Act II: The Eurozone's Dilemma and the ECB's Conundrum
While the European Central Bank (ECB) maintains a neutral stance—insisting policy will remain data-dependent—softening inflation may force a reassessment. The ECB faces a delicate balancing act: if inflation stays low, rate cuts may be needed; if it rebounds, tightening could resume. This uncertainty weighs on the euro.
Meanwhile, the Eurozone economy struggles with high inflation, energy crises, and geopolitical risks—all hindering growth and pressuring EUR/USD.
Act III: Technical Analysis—Decoding Future Movements
Daily Chart: Resistance at 1.17 Holds
EUR/USD's retreat after testing 1.17 suggests this level remains strong resistance. The pair now oscillates between support at 1.1615 and a trendline. A break below the trendline could signal further declines, while surpassing it might open a path toward 1.18.
4-Hour Chart: Watch Key Levels
The trendline and 1.1615 support remain pivotal. Breaching these could indicate trend changes.
1-Hour Chart: Bearish Momentum Defined
A short-term descending trendline marks the current downtrend. Bears may sell rallies near this line, while bulls await a breakout to push EUR/USD higher.
Act IV: Outlook and Trading Strategies
Key upcoming factors:
- U.S. retail sales and PPI data (influencing Fed expectations)
- Supreme Court tariff decision (affecting risk sentiment)
- U.S. jobless claims (labor market health indicator)
Strategy Suggestions:
Bullish: If EUR/USD breaks the 1-hour downtrend line, consider buying dips toward the daily trendline (target 1.18). Stop below 1.1615.
Bearish: If the downtrend holds, sell rallies targeting 1.1615 or lower. Stop above the trendline.
Act V: Final Thoughts
EUR/USD's path depends on U.S. data, Fed policy, geopolitics, and technicals. Traders must stay vigilant and adaptable in this complex environment. Remember: forex trading is a marathon, not a sprint—success comes through continuous learning and disciplined execution.
Note: Forex markets involve substantial risk. This analysis is for informational purposes only and not investment advice.