FX.co ★ EUR/USD: three reasons to buy EUR

The dollar's upward correction looks weak but it still has enough strength and arguments to slow down the rally of the British pound. It seems that a peak for the GBP/USD pair is located at 1.2500. Buyers are unable to push the price to this level and consolidate above it. Today's technical signal will neither support the pound.

The British pound is undergoing a correction after a surge in bullish sentiment. Looking at today's chart, one can notice that a fragile resistance level appeared around 1.2497. Bears have been in full control since early morning.

From a technical point of view, it is evident that the quote has entered the overbought zone.

However, there are contradictions in the signals. There are also buy signals. The British pound managed to consolidate above the signal lines and now, support levels are located at 1.2447, 1.2443, 1.2437, and 1.2396. The rally is unlikely to continue amid the upcoming Fed rate hike, which should support the US dollar. However, there is no reason to expect a significant drop in the pound sterling.

Although the signals are mixed, the most likely scenario at the moment seems to be bearish. The decline in the quote is expected to continue with potential bearish targets at 1.2399 and 1.2350.

A confident break above the 1.2497 resistance level and settlement above it will allow buyers of the British pound to rise towards 1.2540 and 1.2599.

Economists at UOB also believe in the acceleration of the upward impulse after breaking through 1.2500.

Yesterday, analysts had expected the pound sterling to go up. However, they had pointed out that any strengthening would be within the trading range of 1.2405-1.2475. They also mentioned that the currency climbed more than they had assumed, reaching a high of 1.2486 and breaking through 1.2500. Despite such a strong move, they noted that overbought conditions did not allow traders to expect a rally.

Today, the pair will hardly break above this month's high of 1.2545. The support level is at 1.2465, and a break below 1.2440 will signal a weakening of the current upward pressure on the pound.

Support is at 1.2465, and a break below 1.2440 will signal a weakening of the current upward pressure on the pound," analysts believe.

As for the more distant future, UOB expects the pound/dollar pair to trade in a sideways channel between 1.2345 and 1.2510. A break of the 1.2500 level will increase the chances of further strengthening of the exchange rate in the coming days. Overall, the pound sterling should rise as long as it does not fall below 1.2415.

Today, the dollar is trying to find support after the sell-off observed during the American session on Monday. Previously, it declined due to economic concerns and traded around 101.30 as traders reassessed the prospects of the economy and the monetary policy of the Federal Reserve.

The market is examining corporate and economic data to determine whether the US economy could slide into a recession. However, many expect the Fed to raise the rate by another 25 basis points in May.

Treaders focus on US GDP data for the first quarter and the consumer sentiment report for April. From these figures, the markets intend to extract more information about the state of the economy.

Nevertheless, at the beginning of the Asian session, the US dollar index was recovering from a 10-day low set at 101.20. Later, the US will disclose housing price index data for February, new home sales report for March, and consumer confidence index figures.

Euro attracts traders

The European Central Bank also intends to continue raising rates next month. However, it is still hard to predict the magnitude of the key rate hike. It could be either 25 or 50 basis points.

After the latest comment from an important ECB member, the number of long positions on the euro increased.

Pierre Wunsch from the National Bank of Belgium has stated that the market underestimates the scale of the upcoming tightening. Inflation is unlikely to return to acceptable levels if wage growth does not slow down.

Wunsch, who is a member of the ECB's governing council, explained in an interview that they would wait for a decrease in wage growth and core inflation along with overall inflation before pausing the tightening.

Wunsch's particular attention to wage growth suggests that the ECB is not yet close to completing the rate hike cycle, which underscores the euro's recent outperformance.

According to Commerzbank, the euro is the market's preferred currency. First and foremost, the ECB appears to be perceived as more restrictive at the moment due to numerous hawkish comments on the board of directors.

ECB President Christine Lagarde stated in March that higher wages were one of the factors that could boost inflation.

It should be noted that wages in the eurozone grew at a record pace of 5.7% in the period between the last quarter of 2022 and the previous year, as companies increased payout packages to retain and attract staff.

Wunsch does not rule out that the ECB will have to target 4% for the rate, whereas now it is 3.5%. He also made it clear that the market is underestimating the full potential of monetary tightening in the eurozone.

The Fed and the Bank of England are likely to raise rates to a higher final level. In this regard, the euro looks preferable to the dollar and the pound sterling.

The euro is one of the best-performing currencies of 2023 for a number of reasons. First is the fall in gas prices and second is the improved economic outlook. The recent data exceeds expectations.

The improved economic outlook and strong labor market have led to higher wages, which has pushed inflation in the area above the ECB's 2% target.

Higher rates, in turn, boosted regional bond yields and attracted capital inflows from foreign investors looking for positive yields in corporate and sovereign bonds.

HSBC noted that elements of the euro area's external flow became more positive in December 2022. The improvement continued early this year.

Economists are positive about the outlook for the euro as the region's economic picture will continue to improve and the current account surplus will increase, which is a fundamental source of support for the euro.

At the moment, traders are concerned about the level of 1.1000. It acts as a key support in the short term, and sellers are likely to stay away until this level is broken.

A recent decline in the pair to the value of 1.0900 is nothing but a technical correction, according to FXStreet.

A close below 1.1000 may again attract technical sellers and cause a more sustained decline towards 1.0950 and 1.0900.