On Thursday morning, EUR/USD continued to hover near its annual high reached yesterday. It seems that the European currency is poised to grow further, gaining support from the European Central Bank's (ECB) leading position in monetary tightening.

EUR holds the upper hand

In the middle of the week, EUR/USD showed impressive growth of almost 0.6%. The pair hit the daily high of 1.1096, its highest level since April last year.

A sharp rise in the euro came amid risk-on sentiment in the market. The day before, traders were gripped by strong panic over a large-scale banking crisis in the United States.

The cause for concern was the alarming report from the American mid-tier creditor First Republic Bank. On Monday, it became known that in the first quarter, the financial institution faced an outflow of deposits amounting to $100 billion.

However, by midweek, investor emotions had noticeably cooled down. First Republic Bank was still operating, and there were no more signs of stress in other parts of the US financial sector.

Against this backdrop, interest in the US dollar as a safe-haven asset declined. On Wednesday, DXY fell against the basket of major currencies by more than 0.4% and reached a nearly 2-week low of 101.00.

Another blow to the greenback came from the macroeconomic data published yesterday. The report on durable goods orders showed that demand for core goods fell by 0.4% in March, posting a decline for the fifth time over the past seven months.

"We expect further declines in durable goods orders in the US over the next few months as credit conditions continue to tighten," said Kieran Clancy, analyst at Pantheon Macroeconomics.

As we can see, the prospect of a recession in the US is getting real every day. More signs of an economic slowdown are appearing on the horizon, which may force the US Reserve to abandon its hawkish path and move to lower interest rates in the second half of the year.

Such a scenario undermines the dollar's position, especially against the European currency, which is currently supported by strong economic data.

Despite the ECB continuing to tighten monetary and credit conditions in the region, the European economy appears to be more resilient than the American one at the moment, and this is proven by fresh economic data.

Yesterday, German Economy Minister Robert Habeck announced that the German government has doubled its economic growth forecast for the current year from the previously expected 0.2% to 0.4%.

Another positive factor for the euro was the report on German consumer confidence from Gfk for May. The indicator reached -25.7, exceeding economists' expectations and the previous result.

"The eurozone's resilient economy, along with core inflation that continues to rise rather than fall, could lead the ECB to maintain its hawkish stance, thus supporting the euro," said Christina Clifton, currency strategist at the Commonwealth Bank of Australia.

Currently, traders expect the ECB interest rate to increase by either 50 or 25 basis points in May and continue to rise further.

As for forecasts regarding the Federal Reserve's policy, dovish sentiment prevails. Futures markets estimate an 80% chance of a 25-point-rate hike in the US in May and believe that this round of tightening will be the last in the current cycle.

Analysts warn that we may see another surge in speculation about a possible monetary reversal of the Federal Reserve today. The downbeat US GDP report for the first quarter will contribute to the weakening of hawkish market expectations.

The US economy is forecast to contract from 2.6% to 2.0% on a yearly basis. If the actual data meets the forecast or comes in worse than expected, this will send the greenback tumbling across the board, including the EUR/USD pair.

What are the risks for EUR?

The majority of analysts expect the euro to gain new upside momentum next week if the ECB maintains its pace and raises the interest rate again by 50 basis points.

This scenario seems more than convincing, considering the growing inflation and strong economy in the European Union, as well as recent hawkish comments from European policymakers.

This week, President of the National Bank of Belgium Pierre Wunsch stated that the ECB should see convincing signs of a decline in wage growth and core inflation before slowing down or suspending monetary tightening.

However, not all ECB officials are so determined. Thus, ECB Chief Economist Philip Lane confirmed the regulator's intention to raise rates at the May meeting but left open the question of whether further tightening is planned.

Lane noted that much will depend on the state of the eurozone's financial sector as well as April inflation data.

Of course, this comment does not mean that the tightening cycle will be stopped. Yet, it demonstrates the extreme caution of European policymakers, which increases the risk of a less hawkish scenario in May.

According to experts, the main obstacle to the uptrend in the EUR/USD pair could be an interest rate increase of less than 50 basis points next week.

A slowdown in tightening would significantly weaken the euro against the dollar, but the euro would suffer even greater losses if the ECB hints that it is ready to soften its position.

From a technical point of view, the current position of the euro looks very uncertain. Its inability to cross the critical resistance line at 1.1090, as well as the bearish divergence of the RSI, indicate a possible retracement before the next stage of the uptrend.

IG analyst Tony Sycamore believes that as long as the major currency pair remains below the monthly resistance at 1.1075, it is likely to return to the 1.0800 level.