With less than a month remaining until the crucial June meetings of the ECB and the Fed, EURUSD is experiencing a counter-trend rally, buoyed by the bond market. Market consensus anticipates no rate cut from the Fed in June, with an expectation of 1.6 cuts over the course of 2024, while the ECB is expected to commence cutting rates in June, with a projected total of 2.8 cuts for 2024. Meanwhile, US inflation appears to be more persistent than initially anticipated. So, why the surge in EURUSD? 

The answer lies in the Eurozone’s economic activity recovery with the slowing activity in the US. Recent PMI and ISM data reveal shifting trends, particularly in the Eurozone, fostering optimism among EURUSD bulls. However, this bullish sentiment may not be sustained for long. 

(EU-US 10-Year Yield Spread vs EURUSD Daily Chart) 

Since the final days of 2023, EURUSD has reached its peak and formed a downtrend channel. This trend is supported by robust fundamentals favoring the USD, as persistent inflation has tempered overoptimistic expectations of rate cuts and crowded Euro long positions. Non-commercial entities have begun reducing their net long positions during the recent counter-trend rally (indicated by the red channel), and now EURUSD is testing the trend established at the beginning of the year, further supported by the Fibonacci 38.2% retracement level. This presents a favorable scenario for EURUSD bears, provided the trend remains intact. Downward movements could potentially extend as far as 1.048 if inflation remains high and US PMIs exhibit signs of recovery. However, a breakout above the trend, confirmed by multiple daily closures, could significantly alter the technical outlook and prompt a resurgence towards 1.10 once more. 

(EURUSD Year to Date 240M Chart)