EUR/USD stalls at critical resistance amid dollar slide

As markets have begun to question the Trump Administration’s ability to get its planned fiscal agenda through Congress amid intense negotiations surrounding Trump’s promise to repeal and replace Obamacare, the US dollar has continued to stumble this month against other major currencies, including the euro.

With respect to the dollar, much rides on the market’s scrutiny of President Trump’s performance. The dollar’s rise after Trump’s November election was largely due to expectations that the new administration would spark increased fiscal spending, greater economic growth, rising inflation, and climbing interest rates. These expectations boosted the prospects for the dollar, as the correlated anticipation of accelerated monetary policy tightening by the Federal Reserve increased dollar demand.

Since the beginning of the year, however, the Fed’s outlook for interest rates has not accelerated, despite a March rate hike last week. In addition, persistently overheated market optimism for President Trump’s fiscal stimulus plans in the past few months has cooled down recently as Trump faces ongoing challenges to his agenda and political standing.

Aside from this dollar slide, a stronger euro has further contributed to the EUR/USD surge since the beginning of March. As inflation pressures and expectations have risen in the Eurozone, the European Central Bank will have a much more difficult time remaining in its extreme easing mode. Indeed, the ECB has recently brought up the possibility of raising interest rates before ending its bond purchase program. Speculation over this possibility has helped lead to the sharp boost for the euro against the dollar, as the prospect of narrowing policy divergence between the Fed and ECB becomes increasingly conceivable.

From a technical perspective, EUR/USD now sits on a perch around the critical 1.0800 level, at the very top of a major trading range. The past two days have seen the currency pair slightly exceed 1.0800, but this resistance level has essentially held for the time being. A key trigger for how the dollar moves from here will be how the market assesses Trump’s ability to accomplish his economic objectives amid congressional opposition. If the dollar continues to slide on lowered hopes for Trump’s agenda coming to fruition, a EUR/USD breakout above 1.0800 resistance would constitute a critical technical event. With such a breakout, the currency pair could begin to target key resistance around the 1.0950 level. With any major turn down from 1.0800, however, EUR/USD will move back into the trading range, with the key downside target remaining at the 1.0500 support level.

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