EUR/USD: Central banks have a complex situation to sort out

Traders will be focusing on two major monetary policy events this week: a meeting of the Fed's Federal Open Market Committee and a meeting of the ECB's Governing Council, with outcomes scheduled for Wednesday and Thursday, respectively. Geopolitics will naturally once again influence the deliberations of policymakers and central bankers, against a backdrop of chronically high oil prices.

"The Wall Street Journal reported last night that Trump and his staff are skeptical of Iran's offer (which we discussed yesterday) to reopen the Strait of Hormuz while postponing nuclear negotiations," notes Deutsche Bank. "The Wall Street Journal article suggests that the White House is expected to present a counter-proposal to Tehran in the coming days," the German bank adds.

"For central banks, the situation remains complex. They must assess the magnitude, persistence, and transmission of the current energy price shock. But they must also be proactive enough to contain inflation expectations and thus avoid a sustained rise in inflation rates. Barring a very sharp upside surprise in the flash inflation data (CPI) published Thursday morning, the European Central Bank is expected to keep its rates unchanged this week," anticipates Felix Feather, an economist at Aberdeen.

"President Christine Lagarde could, however, use her press conference to lay the groundwork for the first rate hikes as early as June. Policymakers will seek greater clarity on the magnitude of the shock, particularly the extent and duration of supply chain disruptions, as well as their impact on pricing behavior. There is good reason to believe that companies will have less capacity to pass on higher costs to consumers than in 2022, a period marked by a catch-up in demand and historically tight labor markets."

"On Thursday, the war in Iran will likely be a major risk theme, while a small 'precautionary' hike in June should remain on the table, pushing rates back towards the upper limit of the neutral zone," warns Martin Wolburg, senior economist at Generali Investments. The latest PMI activity indicators and the disastrous scores of the German ZEW and Ifo indices certainly do not support a strengthening of monetary policy in the coming months.

With somewhat different stakes due to the United States' reduced dependence on crude oil imports, the Federal Reserve (Fed) begins its FOMC meeting this Tuesday. This provides an opportunity to gauge the impact of the energy shock on Fed members, whose next chairman is expected, barring any surprises, to be Kevin Warsh. "Friday's announcement that the DOJ had dropped its investigation into Jerome Powell, paving the way for Kevin Warsh's nomination as the next Fed chairman, should make Jerome Powell's decision to remain at the helm of the institution a central issue in the debate on the Federal Reserve's independence."

The multimillionaire lawyer is hard to read: his comments were rather hawkish (belligerent on monetary policy) when he was a member of the Board in the early 2010s; in recent months, he has criticized John Powell's hardline stance; he has also praised "the pro-growth policies pursued by President Trump," thanks to which "the United States will grow faster than other major economies." According to him, the central bank must, in particular, "abandon the dogma that inflation is caused by excessive economic growth and wages that are too high." Inflation occurs "when the government spends too much."

Right now, the EUR/USD is trading at $1.1697.

KEY TECHNICAL ELEMENTS
From a technical perspective, the euro/dollar pair is now encountering a pivotal zone. After erasing much of its pullback related to the acute phase of the conflict, it is trading near the upper boundary of its trading range. This configuration reflects a compression of volatility and marked hesitation among market participants, who are currently unable to trigger a sustained upward movement. In the absence of a clear catalyst - whether macroeconomic, monetary, or geopolitical - the pair remains contained below this major resistance ($1.1825), in a wait-and-see phase that could lead to a more directional move once this equilibrium is broken.