EUR/USD retests key zone as dollar weakness follows peak hawkish repricing

EUR/USD is retesting a key resistance zone as the US dollar weakens, driven by signs that the hawkish repricing in interest rate expectations following the Federal Reserve's surprise rate hike projection may have peaked.

The US dollar had been supported after the Fed's hawkish dot plot last week, which showed the central bank projecting a rate hike this year, contrary to the consensus expectation of no cuts or hikes. This led to a significant hawkish repricing, with markets now pricing in 32 basis points of tightening by year-end, a 29% chance of a hike in July, and a 60% probability of a move in September. However, in the last couple of days, there has been a slightly dovish repricing. One factor could be the huge selloff in oil prices, which have now reached pre-war levels, reducing inflationary pressures. Another reason is that the hawkish repricing might have reached a near-term peak, prompting profit-taking and a reassessment of the dollar's upside.

For forex traders, the EUR/USD pair is particularly sensitive to shifts in interest rate differentials between the US and the Eurozone. The recent dollar weakness suggests that the market is questioning the sustainability of the Fed's hawkish stance, especially if oil prices continue to fall and inflation expectations moderate. Live FX prices and charts on NowPrice show EUR/USD approaching a key technical zone, which could act as a pivot for the next directional move. A break above this resistance would signal further euro strength, while a rejection could see the dollar regain its footing.

Looking ahead, traders will focus on upcoming US economic data, including inflation reports and employment figures, to gauge whether the Fed's hawkish bias is justified. Additionally, any further decline in oil prices could reinforce the dovish repricing, weighing on the dollar. The Fed's rhetoric in the coming weeks will also be crucial; if officials push back against market expectations of a less aggressive path, the dollar could recover. For now, the key question is whether the peak hawkish repricing is indeed behind us, which would open the door for a sustained dollar decline and a potential breakout in EUR/USD.