• While European growth prospects were improving, the Russia-Ukraine conflict served as a wake-up call, adding to inflationary pressures and rising energy costs.
• Since June last year, it has been rather one-way traffic for the euro against the dollar as the market focused a lot on the eurozone’s and the US’s policy and economic divergences. Given the prospect of a worsening economy, the window for tightening policy may be limited.
•  But that hasn’t stopped markets from believing that the ECB can Deliver aggressively. As things stand, money markets have priced in 110 basis points of rate hikes by the Fed this year. That equates to at least four 25 basis point rate hikes, putting an end to Europe’s negative interest rate “experiment” – at least for the time being. 
• Markets have “fully” priced in what the ECB can do this year, but the same can be said for how markets perceive the Fed. The ECB’s shift is arguably more significant in terms of symbolism, which may lead to markets reacting more strongly than the Fed’s policy pricing.
• But we’ll have to take it slow and steady with this one. A lot can still happen by July, and the risks could be skewed even more on either side of the equation. For the time being, the recent hawkish ECB rhetoric is helping the euro. 
• EUR/USD has been under significant downward pressure in recent months, with the pair falling from 1.1000 in April to 1.0400 earlier this month. The dollar has been on a tear, and it may be time for a pullback, especially with the ECB officially confirming a policy shift.
• Key support around 1.0400, as well as the December 2016 lows around 1.0340-66, help to limit the latest downside momentum. That’s a significant level to have held, and it’s allowing buyers to find some breathing room for the time being. 
• A return to 1.0800 is certainly possible. However, given that the Fed is likely to face fewer obstacles in tightening policy than the ECB, any extended rally towards 1.1000 is likely to be sold into. Of course, all of this is contingent on the inflation narrative in the coming months, so data dependability is critical to the outlook.

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