- EUR/USD advanced to six-week tops near 1.1450 at the beginning of the week.
- The US Dollar retreated markedly to a multi-week trough on trade fears.
- The US ISM Manufacturing PMI disappointed market participants in May.
As the US Dollar (USD) came under extra downside pressure, the Euro (EUR) rebounded on Monday, motivating EUR/USD to hit fresh multi-week highs around the 1.1450.
The US Dollar Index (DXY), in the meantime, slipped back below the key support at 99.00 for the first time since mid-April.
The sudden retreat in the greenback followed President Trump’s fresh threats on new tariffs on steel and aluminum, while another bout of US-China effervescence also collaborated with the sour mood around the Greenback
Dollar weighed down under trade tensions
President Trump announced his intention to raise tariffs on imported steel and aluminium from 25% to 50% last Friday, thereby intensifying pressure on global steel producers and escalating his trade war.
Trump intensified the global trade war by doubling steel and aluminium levies, which he announced just hours after accusing China of violating an agreement with the US regarding the mutual rollback of tariffs and trade restrictions for critical minerals.
The announcement damaged the dollar just as markets were absorbing conjecture over a possible 50% tax on EU imports, which had earlier lifted the European currency and the Greenback amid fresh optimism for more general trade discussions.
Still, larger issues over the lack of urgency in US negotiations with China and the UK remain a drag even as the possibility of new US-EU talks keeps risk attitudes alive.
Divergence in the central bank once again in the focus
FX market dynamics still mostly reflect different policy perspectives taken by the Federal Reserve (Fed) and European Central Bank (ECB).
In May the Fed kept interest rates the same despite lowering inflation and residual trade concerns.
Minutes from the conference exposed a divide among legislators dealing with “difficult trade-offs” between lowering inflation and boosting employment, hence fuelling hopes for two rate cuts this year, maybe starting in September.
Meanwhile, the ECB dropped its deposit rate by 25 basis points to 2.25% in May. Now, markets are pricing in yet another decrease right away at this week’s meeting.
Frankfurt’s message still is wary, however. While ECB Chief Economist Philip Lane highlighted residual inflation concerns, particularly should EU-US trade negotiations go apart, Bundesbank President Joachim Nagel said it was “too early” to announce more easing.
Based on weaker inflation numbers and tariff concerns, the ECB seems set to act once again later this week. It has already slashed rates seven times during the last 13 months.
Speculative flows turn more bullish on the Euro
Data on CFTC positioning for the week ending May 27 saw net long holdings in the euro climbing to around 79.5K contracts—a two-week high. Reflecting increasing investor participation, open interest rose to nearly 760.5K contracts, the most since December 2023. Pointing to increased hedging activity, commercial traders also raised net shorts to 132K contracts.
EUR/USD technical environment
EUR/USD remains technically constructive while above ist critical 200-day SMA.
Key up-barrier is seen at the 2025 peak of 1.1572 (April 21), followed by the 1.1600 milestone, and then the October 2021 high at 1.1692 (October 28).
Southwards, transitory support is at the 55-day SMA at 1.1175, with additional floors at the May low at 1.1064 (May 12) and the round figure at 1.1000. A breach below that reveals the key 200-day SMA at 1.0815.
Momentum indications vary. While the Average Directional Index (ADX) around 20 points to a maturing trend with declining strength, the Relative Strength Index (RSI) past 60 suggests an increasing bullish bias.
EUR/USD daily chart
Looking forward on the front of data
The eurozone is set to release its preliminary Inflation Rate and Unemployment Rate on June 3. On June 4, the final HCOB Services PMI for Germany and the Eurozone is anticipated. On June 5, Germany is set to release its Factory Orders and the HCOB Construction PMI. This date will also see the publication of the EMU’s HCOB Construction PMI and Producer Prices. Germany is set to release its Balance of Trade results, which will precede the euro area’s Retail Sales, Employment Change, and the final Q1 GDP Growth Rate figures, all on June 6.
