EUR/USD approaches 1.1100 as Fed chooses neutral guidance, ECB policy highs limelight

• EUR/USD is marching towards 1.1100 as the USD Index is facing multiple headwinds.
• Federal Reserve has changed its policy stance guidance to neutral after hiking rates consecutively by 25 bps to 5.00-5.25%.
• A decline in credit disposal from European banks could force the European Central Bank to announce a smaller rate hike.
• EUR/USD is on the verge of delivering a breakout of the Ascending Triangle.

EUR/USD has shifted its auction comfortably above the critical resistance of 1.0800 in the early European session. The major currency pair is expected to extend its upside journey towards the round-level resistance of 1.1100 as the Federal Reserve (Fed) has changed its policy stance guidance to neutral after hiking rates consecutively by 25 basis points (bps) to 5.00-5.25%. However, the road to reaching the terminal rate for the European Central Bank (ECB) is far from over.

S&P500 futures have added decent gains in the Asian session, portraying a meaningful recovery in the risk appetite of investors. US equities were heavily dumped by investors on Wednesday amid uncertainty over the Fed’s roadmap of arresting sticky inflation. Also, a bloodbath in PacWest Bancorp renewed fears of a US banking crisis. Bloomberg reported that PacWest Bancorp is considering strategic options, including a potential sale.

The US Dollar Index (DXY) is defending the immediate support of 101.07, however, the absence of recovery signs is strengthening the downside bias. Federal Reserve’s change of language to ‘monetary action will be data dependent’ from ‘some appropriate tightening would be required’ has trimmed expectations of further policy-tightening dramatically.

US debt ceiling saga

There is no denying the fact that a shift in policy stance by the Federal Reserve has weighed heavily on the US Dollar. It is highly anticipated that the policy-tightening spell by the Federal Reserve is paused for now considering the mounting banking crisis and deepening fears of a US recession.

Apart from that, catalysts that have capped the upside in the USD Index are renewed US banking woes and debt ceiling concerns.

A few days back, US President Joe Biden denied negotiations on raising the US debt ceiling with Republicans as they were supporting it at the cost of the President’s spending initiatives. The White House is not ready to make negotiations, however, repercussions of delay in US debt ceiling talks are haunting the USD Index.

US Treasury has already confirmed that it will run out of funds in early June, which would result in a default on payment obligations. According to an analysis by the White House Council of Economic Advisers, a protracted default on U.S. payment obligations could result in the loss of 8.3 million jobs and a 6.1% reduction in economic output, as reported by Reuters.

To avoid such circumstances, the White House could come sooner on the table for negotiations otherwise it would cost severe damage to the US economy.

European Central Bank to lift interest rates further

The street is awaiting the announcement of the interest rate decision by the European Central Bank to understand how swift policymakers are looking to tame stubborn Eurozone inflation. Investors are divided over the pace of the interest rate hike as the growth rate in the Eurozone economy has squeezed sharply. Reuters reported that a decline in credit disposal from European banks and softening inflation is bolstering the case of a smaller interest rate hike announcement from European Central Bank President Christine Lagarde. However, European Central Bank Governing Council Member Isabel Schnabel said last week that a 50 bps interest rate hike is on the cards.

EUR/USD technical outlook

EUR/USD is on the verge of delivering a breakout of the Ascending Triangle chart pattern formed on a four-hour scale. The upward-sloping trendline of the chart pattern is plotted from April 17 low at 1.0910 while the horizontal resistance is placed from April 14 high at 1.1076.

Advancing 10-period Exponential Moving Average (EMA) at 1.1050 is diverged from the shared currency pair, indicating a sheer strength in the Euro bulls.

The Relative Strength Index has shifted into the bullish range of 60.00-80.00, which conveys that more gains are in the pipeline.