EUR/USD Technical Analysis: ECB Rate Expectations and Trend Outlook

Market Overview and Wave Analysis

The EUR/USD 4-hour chart indicates a modification in the prevailing wave pattern. While the long-term upward trend initiated last year remains technically intact, the current structure has shifted into a corrective phase. Analysts are monitoring for a potential wave C development, which could extend below the lows established by wave A.

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On lower time frames, a classic three-wave corrective structure has been identified, followed by the initiation of a new downward trend segment. Should this segment prove impulsive, a five-wave structure within wave C is probable, with a potential target below the 1.1400 support level. Market sentiment remains cautious, influenced by geopolitical uncertainty rather than clear directional momentum.

Fundamental Drivers and Inflation Data

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The Eurozone reported a rise in the May Consumer Price Index to 3.2% year-on-year, with core inflation reaching 2.5%, surpassing market expectations. Despite these elevated figures, the EUR/USD pair has demonstrated muted price action. Investors appear to be prioritizing geopolitical developments over inflation data, limiting the pair's volatility.

These inflationary pressures strengthen the case for the European Central Bank (ECB) to resume monetary policy tightening. ECB officials, including Isabel Schnabel, have advocated for rate hikes to combat persistent inflation, further compounded by energy price risks associated with Middle East tensions. However, the market has yet to reflect these hawkish expectations in the euro's valuation.

Technical Outlook and Conclusion

The current technical environment suggests that wave 5 may be forming within the broader wave C structure. If this bearish sequence continues, targets around 1.1352, aligning with the 38.2% Fibonacci retracement level, remain in focus. Conversely, a failure of this bearish momentum could result in a truncated sequence, with the correction concluding near 1.1600.

Ultimately, the instrument resides in a period of consolidation, navigating between long-term bullish structural support and near-term corrective pressure. Once the A-B-C correction cycle completes, the market may re-evaluate the potential for a resumption of the primary upward trend. Traders are advised to utilize protective stop-loss orders given the current sensitivity to external geopolitical factors.

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