Sentiment has improved recently and the monetary policy divergence between the European Central Bank and the US Federal Reserve has started to become less pronounced. The Fed is still on a hawkish path and expects to deliver more 50 basis points rate hikes over the next couple of meeting, but seems a bit conservative, as Chair Powell had ruled-out more aggressive 75 basis point increases after the last policy meeting. 
Recent data could support a more timid stance, as inflation has been easing recently and economic activity has been slowing down. The Fed's preferred gauge of inflation, the Core PCE eased to 4.9% year-over-year in April, from 5.2% prior, while Q1 GDP contracted by 1.5% as the second reading showed las week.
The ECB on the other hand, is far behind its major counterparts, but has been shifting towards a more hawkish stance and Ms Lagarde offered a faster tightening path than previously communicated. The ECB president expects the assets purchase program (APP) to end early in the third quarter which would allow for "rate lift-off at our meeting in July" and to "exit negative interest rates by the end of the third quarter".
EUR/USD is having very bad year because of the adverse policy differential, but it has made significant progress in May, highlighted by the fact that this will be the first positive month of 2022 and the two straight profitable weeks it registered, is something that has not happened since December.
Today, the common currency retains its positive undertone and tries to take out the critical levels we have highlighted from our previous analysis, the descending trendline from this year's highs and the 38.2% Fibonacci of the 2022 High/Low drop (at around 1.1080).
Daily closes above this area could put medium-term bias on the upside and could open the door to a recovery towards and beyond the 50% level (1.0921).
However, the road to such a recovery is not easy, since a thick daily Ichimoku Cloud loolms. Furthermore the Releative Strenght index (RSI), did not follow EUR/USD higher of Friday, a divergence that does not bode well for its ascending prospects.
As long as it does not surpass 38.2%, it is vulnerable to renewed pressure to the EMA200 (1.064-70), although a deeper decline and test of 1.0556, will likely require a catalyst.
Caution is needed as Wall Street will be closed today and we will need to see in what mood will US traders return on Tuesday. From the economic calendar, we expect preliminary inflation figures from Eurozone tomorrow, whereas EU leaders meet to discuss, among other things, an embargo on Russian oil.
Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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