The EUR/USD exchange rate has pulled back in the past two weeks as the US Dollar Index (DXY) rebounded. The pair traded at 1.1165 on Friday, down from the year-to-date high of 1.1572. This article explores what to expect as policymakers pitch the euro as a viable alternative to the US dollar.
ECB leaders pitch the euro as the alternative to the US dollar
Senior European Central Bank (ECB) officials are pitching the euro to become an alternative to the US dollar. In a recent statement, ECB Vice Chairman, Louis de Guindos noted that the euro had a real chance of becoming a reserve currency in some years if additional integration happens. He said:
“I don’t think that we are in a position to be an alternative as a reserve currency, but I think we’re at the best position to become one in some years.”
Christine Lagarde, the head of the ECB also noted that the euro was best positioned to become an alternative to the US dollar. She cited the fact that the euro surged during the Donald Trump tariff tantrum in April. Historically, the US dollar soars when there are elevated risks. Lagarde said:
“At a time when we see the rule of law, the judicial system, and trade rules being called into question in the US, where uncertainty is permanent and renewed daily, Europe is rightly perceived as a stable economic and political area, with a sound currency and an independent central bank.
Still, while trust in the US dollar is fading, having an alternative won’t be easy. Data shows that the US dollar accounted for about 57% of all forex reserves globally. The euro follows it at 20% and the Chinese yuan and Japanese yen at less than 5%.
The US dollar is also the dominant player in world trade, where most international trade is done using it.
Next ECB and Fed actions
One reason for the US dollar’s strength is that the US has a neutral central bank that Washington politicians do not influence. This explains why the bank has shrugged off Donald Trump’s calls to cut interest rates. It also explains why Trump has not attempted to fire Jerome Powell since that decision would be challenged in court.
The next key catalyst for the EUR/USD pair will be the actions of the Federal Reserve and the European Central Bank. In a recent statement, Pierre Wunsch, the head of the Belgian central bank, said that the bank should consider cutting rates below 2%.
The former hawk highlighted the growing risks facing the world economy, including the substantial trade tensions. Analysts expect that the bank will cut rates more this year, while the Fed has urged caution.
EUR/USD technical analysis
The daily chart shows that the EUR/USD exchange rate peaked at 1.1572 on April 21 and then retreated to 1.1165 today. It has moved below the important support at 1.1211, the highest swing in September last year, and the upper side of the cup and handle pattern.
The pair is being supported by the 50-day Exponential Moving Average (EMA). Therefore, the pair will likely bounce back since C&H is one of the most bullish chart patterns in technical analysis.
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