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Read on to take a look at our current outlook for the euro-dollar currency pair.
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Retracement higher done?
Market selling of USD was reversed from the previous week, with Fed Powell doubling down on his hawkish stance on more rate hikes to come. Evidence of the European economy showing signs of slowing was evident from June’s PMI number, raising the question - how long will the ECB (European Central Bank) remain hawkish in their stance on monetary policy?
The September uptrend was broken in May and price action is suggesting that a reduction in interest rate differentials could start to cause more demand for USD.
The ongoing battle with inflation remains a key driver on the GBPUSD pair, with the impact on interest rate expectations. Markets will eventually have to weigh up the impact of higher interest rates on each respective economy and the strongest will likely make that respective currency stronger. Signs of weakness in European activity could threaten the ECB’s ability to remain hawkish.
We’ll have several ECB (European Central Bank) speakers this week, with the only notable data points being June’s inflation numbers from across Europe. Signs of prices dropping will likely weaken the EUR.
From the US, Fed speak, GDP numbers, and core PCE inflation numbers will be in focus. Money markets are only pricing in one more rate hike by the Fed (Federal Reserve) this year versus Fed Powell’s comments suggesting more than one hike. USD demand could build should data suggest that more hikes need to be done. “Resistance 1” should cap gains on the EURUSD pair and should demand for USD continue to build then “Support 1” will be the target.
Rangebound
Continued hawkish speak by the ECB (European Central Bank) supported the EUR, driving rates to the “Resistance 1” area.
Despite the Fed’s (Federal Reserve) hawkish pause comments last Wednesday, we saw broad weakness in USD with the greenback having its worst performance since January. Prices still remain below the September uptrend support line, indicating the potential for future downside on EURUSD, but this doesn’t seem to be a thought in the market quite yet.
Fed speak will be in focus this week for USD, with Fed Powell delivering his semi-annual monetary policy to the House on Wednesday. Hawkish cues will be looked for following the hawkish pause from the Fed last week. June’s services and manufacturing PMI numbers will be released on Friday.
We’ll have several ECB speakers this week, with the only notable data point being the services and manufacturing PMI numbers on Friday.
Downside seems intact
This week, Fed speak alluded to the idea that the Fed (Federal Reserve) will skip a rate hike in June, but they may be open to a hike in July. So to no surprise, odds of a June hike dropped which saw renewed weakness in the USD. The big test was a move back to “Resistance 1” ahead of US job numbers. The numbers came in strong, adding to ADP and JOLT numbers earlier in the week, causing USD to force a comeback at the end of the week.
The difference in interest rate expectations between the Fed and the ECB (European Central Bank) continues to reduce, following the lower inflation numbers from Europe.
Services PMI numbers are the only major data point from the US, so Fed speak will likely be the main contributor to any USD moves. Markets are now pricing in a low chance of a hike in June, but also continue to to trim the chances of rate cuts later in the year by the Fed. Anything to suggest a strong economy will likely add to USD gains.
The negative move on the EUR over May does seem excessive, so there is a good chance that markets see this weakness as a good opportunity to buy the common currency as a value proposition, but data will need to support this.
So this week we look at services and construction PMI numbers, as well as revised numbers on growth for the 1st quarter of this year. Inflation is dropping, but have aggressive rate hikes slowed growth?
Downside set to continue?
The EUR continues to be unfavoredby markets following the fall through “Support 1”, suggesting more downside to come. Demand for USD continues to take precedence with markets continuing to ease Fed (Federal Reserve) rate cut expectations.
Now that there is a bit of relief surrounding the US debt ceiling, it seems markets will refocus on inflation and the Fed’s expected rate moves. US job numbers in the form of ADP, JOLTS, and nonfarm payrolls will be key and anything to suggest the job market is still strong, then we would anticipate further gains for USD.
This week, inflation numbers from the eurozone will be the key data point. Whilst market pricing for additional rate hikes by the ECB (European Central Bank) remains around 0.5%, demand for the EUR has dropped suggesting perhaps markets have peaked in their expectations for these hikes.
Inflation in May is expected to show signs of easing, which would add to the continued selling of EUR. However, any uptick in inflation numbers then expect a sharp rebound on the EUR.
Uptrend broken, further falls to come?
Last week, September’s uptrend line was breached and the move followed throughout the course of the week, as the divergence on interest rate policies between the Fed (Federal Reserve) and the ECB (European Central Bank) narrowed.
Market thoughts are now alluding to the idea that perhaps we have passed peak rate cut expectations from the Fed this year and passed peak rate hike expectations by the ECB. For the downtrend to be countered, we’ll need to see a breach of “Resistance 1”.
This week, focus will be on how much data points can continue to ease rate cut expectations by the Fed this year. ON Tuesday, performance of the economy will be judged by PMI numbers, followed by estimates for growth in the first quarter of this year. Ultimately, stronger numbers here would suggest a resilient economy that could withstand further rate hikes if needed. Core PCE inflation numbers are expected to show inflation pressure rose in April, which should support more USD strength. On Wednesday evening, we get the minutes from the latest Fed meeting, where we will be looking for cues on future Fed rate policy.
With the euro on the back foot of late, numbers this week will need to be vastly better than expected to support the single bloc currency. On Tuesday, we start with PMI numbers, IFO sentiment figures from Germany on Wednesday, and first quarter growth data from Germany on Thursday.
The current price action seems to suggest further drops on EURUSD and should we see a breach of “Support 1”, then the key level at “Support 2” (2023 low) will likely be tested.
Uptrend being tested
A lack of follow through “Resistance 1” kept EUR gains at bay, with USD buying taking precedence last week due to safe haven buying. As a result, there seems to be a threat of the uptrend from September being broken. A move lower through here would then bring “Support 1” and “Support 2” into play, a break through “Support 2” in particular looks to be key in breaking the uptrend structure.
April’s retail sales numbers and continued debt ceiling talks will be the main focus from the US, with the latter most likely to take precedence for USD moves. Continued concerns of the US defaulting should add to more safe haven buying of USD, taking the pair towards “Support 1” and “Support 2” area. Fed speak will also be in focus, continued pushback on the market pricing in interest rate cuts this year should also support USD.
From Europe, Q1 GDP numbers are out on Tuesday, followed by April’s inflation numbers on Wednesday. Since the last ECB (European Central Bank) meeting, interest rate expectations have eased in the market, causing the EUR to weaken. Strong growth numbers and higher inflation numbers may give the EUR support.
Uptrend still supported
The EUR continues to be supported at key levels, as markets continue to back the idea that the ECB will continue their rate hike cycle this year. The April highs have been tested numerous times this month without a follow through, but it seems that its only a matter of time before we see fresh 1-year highs.
US data is on tap this week with another set of PMI releases, but focus will be on Wednesday’s Fed meeting, followed by job numbers on Friday.
Markets are currently pricing in one final hike by the Fed of 0.25%, followed by a pause and then the prospect of a rate cut at the end of the year. As ever, the accompanying rate statement will be key for the Fed to either concede to the markets’ expectations of future rate cuts or continue their protests claiming that an extended pause in their hike cycle is more than likely. Job numbers will also be key to give a gauge of how the economy is performing.
German inflation numbers last week showed prices eased in April, this week markets will focus on the inflation numbers for the Euro area ahead of the ECB rate decision on Thursday. A 0.25% rate hike is priced in with another 0.50% worth of hikes is expected for the rest of the year. A hawkish statement from the ECB along with a dovish Fed, and fresh 1-year highs could be seen.
Uptrend still supported
The EUR continues to be supported at key levels, as markets continue to back the idea that the ECB (European Central Bank) will continue their rate hike cycle this year. USD attempted to fight back following Fed speak, reducing the chances of rate cuts later this year.
The Fed (Federal Reserve) is in a blackout period this week, so focus will be more on the available data. US GDP numbers for Q1 and key measures on inflation, the employment cost index, and core PCE will be the focal points and any prints higher will likely reduce expectations of any rate cuts by the Fed and benefit USD.
However, it’s worth bearing in mind that any weakness in EURUSD could be limited, given trend and sentiment on likelihood for the ECB to continue hiking interest rates. Stronger GDP numbers from Germany and the EU area will add to the case that the respective economies can continue to withstand more hikes. German inflation numbers will also be released this week.
Resistance capping gains
The EUR broke to a new 12-month high on the back of weaker US inflation numbers. However, on Friday, a sharp reversal of the weekly move was seen, with EURUSD finishing below “Resistance 1” as markets reduce year-end Fed (Federal Reserve) rate-cut expectations.
The move lower wasn’t substantial, signalling momentum and continues to be behind the EURUSD uptrend.
At the end of the week, US PMIs will give a measure of how the US economy performed in April, but focus this week will be mainly on Fedspeak. The May 0.25% rate hike by the Fed is largely priced and market focus will be on year-end rate hike/ cut expectations. A reduction of rate-cut expectations should see the USD gain.
Continued support for the EUR can be seen in the form of rate hike expectations from the ECB (European Central Bank), as markets continue to price in 0.78% worth of rate hikes across the year. This week’s focus is expected to back this call, will come from inflation numbers and PMI data for the month of April. Higher inflation and good economic output should continue to support the EUR.
China GDP this week will also be in focus, as the China re-growth story continues to be one of the supporting factors for the EUR.
Downtrend to begin?
Last week, we saw EUR test the area at “Resistance 1” versus USD, however, prices failed to remain above “Resistance 1”, signalling a lack of momentum for the current March uptrend to continue.
Friday’s job numbers heightened the chance of a 0.25% hike in May, causing the uptrend to break, signalling a move lower. A breach of “Support 1” would indicate and suggest an expected further drop.
In the US, focus will be on March’s core consumer inflation and producer inflation numbers, as well as retail sales. Should the data point provide further ammunition for a 0.25% hike in May, then we could well see further demand for USD. Additionally, several Fed (Federal Reserve) members are expected to speak throughout the week.
Very little is set to come from Europe this week, with retail sales data expected as well as inflation numbers from Germany.
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