EUR/USD: what room for manoeuver does the ECB have?

The euro continues its climb - or conversely, the dollar keeps weakening - in the midst of an intense and uncertain trade war environment, where the situation shifts according to the presumed instincts of Donald Trump. Tomorrow, the European Central Bank (ECB) will face the difficult task of concluding its Governing Council under these foggy market conditions.

"Donald Trump's surprise announcement of a temporary 90-day suspension of so-called 'reciprocal' tariffs, alongside a reduction to 10% for countries not responding with countermeasures, has fuelled hopes of a gradual easing and reignited discussions of upcoming sector-specific negotiations - particularly in semiconductors and the pharmaceutical industry," comments Thomas Giudici, Head of Fixed Income Management.

"Nonetheless, uncertainty remains high. While the American gesture was welcomed, it doesn't spell the end of trade tensions, especially with China, which is still subject to 145% tariffs (excluding smartphones and personal computers). The US budget situation - with a sharply rising forecast deficit and a concerning debt trajectory - also continues to worry investors. Household inflation expectations are on the rise again, while the Fed remains cautious in the face of the risk of another imported inflation shock."

As mentioned earlier, the ECB concludes a Governing Council meeting on Thursday - the equivalent of the Fed's FOMC - with consensus expecting a 15 basis point (bps) cut to the main interest rate. This rate cut, potentially as deep as 25 bps, is widely priced in, reflecting the risks to growth. However, the ECB is expected to remain cautious going forward, as markets continue their rollercoaster ride. More clarity regarding the pace of rate cuts is expected in June.

"Given the high level of uncertainty, we don't anticipate any changes to the ECB's communication: it will remain data-dependent, with decisions made on a meeting-by-meeting basis. Further short-term rate cuts cannot be ruled out, though the ECB's room for manoeuvre is limited - particularly due to Germany's fiscal stance," says Ulrike Kastens, Senior European Economist, carefully hedging her outlook.

"The upheavals of recent weeks certainly support the cycle of monetary easing initiated by the major central banks. Trump's recent decisions also remove a degree of doubt for the ECB in Frankfurt, which had been hesitant to proceed with its easing programme if the Fed were to halt its own. However, the Trump administration's announcements are likely to fuel significant short-term volatility in the US economy (2% of US GDP could be siphoned from private actors), and the Fed may be forced to continue cutting rates despite inflationary pressures," explains Maxime Mura, Rates & IG Credit Portfolio Manager at Swiss Life Asset Managers France.

On the data front on Tuesday, markets reacted to the even steeper-than-expected collapse in the ZEW Economic Sentiment Index for Germany - the Eurozone's largest economy - which fell from 39.8 to -14.

ZEW President Achim Wambach provided the following analysis: "The erratic shifts in US trade policy are weighing heavily on expectations in Germany, which have dropped significantly. It's not only the potential consequences of the newly announced reciprocal tariffs on global trade, but also the volatility of their implementation, that have substantially increased global uncertainty. Economic expectations for Germany and the Eurozone reflect this development."

Coming up on Wednesday: US retail sales figures, expected to show a monthly increase of 0.4%, excluding automotive sales. This is a closely watched indicator on trading floors, given that domestic consumption is structurally the main driver of wealth creation in the US.

Right now, the Euro is trading around $1.1361.

KEY TECHNICAL ELEMENTS
The triangle consolidation observed from 4 to 9 April has now concluded, with the EUR/USD pair breaking out sharply to the upside. The released momentum is strong, and the ease with which resistance levels have been shattered suggests further gains ahead. An accumulation zone is identified between $1.1460 and $1.1674, with an upward target of $1.1970.

MEDIUM-TERM OUTLOOK
In light of the key technical indicators mentioned, our medium-term view on the EUR/USD currency pair is positive.

Our entry point is at $1.1369 , with a price target of $1.1970. To protect invested capital, we recommend placing a stop-loss at $1.1169.

This forex strategy offers a return expectation of 601 pips with a risk of 200 pips.