EUR/USD Forecast: Fed and ECB shake the foundations
|- A hawkish Fed and a dovish ECB made the EUR/USD pair collapse toward weekly lows.
- Trade war jitters may take center stage in a light macroeconomic week.
- Sentiment on the EUR/USD leans lower in the next week and month, with a recovery afterward.
What a week! Things moved in slow motion until Thursday across the FX board, but intense headlines kept coming pretty much since the week started. The dollar refused to surge despite encouraging local data, as speculative interest wanted to asses all the first-tier events before making up their minds one way or the other. Clearly, the decision made was in favor of the greenback.
The Trump-Kim historical meeting early Tuesday was a first step toward easing geopolitical concerns, but beyond Trump's grandiloquent statement about peace achieved and denuclearization being in the process, the truth is that no commitment was made between the two countries. Anyway, it was positive for market's mood.
Data coming from the US was quite solid, while European one confirmed that economic growth momentum began easing with the year and that the deceleration continues. US inflation came at a solid 2.8% YoY in May, up monthly basis by 0.2%, as expected. More encouraging, Retail Sales more than doubled market's forecasts in the same month, increasing by 0.8%. In the Euro area, on the contrary, Industrial Production for April disappointed, falling 0.9% in the month and up by 1.7% from a year earlier, well below the previous 3.0%. Inflation in the Union was confirmed at 1.9% YoY in May, while the core yearly figure remained also unchanged from the previous estimate at 1.1%.
A whole different chapter were central banks and the imbalance between both, the reason why the EUR/USD pair is back flirting with multi-month lows.
The US Federal Reserve hiked rates as expected by 25 bps, and the dot-plot was upgraded to four rate hikes this year. The accompanying statement suffered multiple minor corrections that reflect the ongoing tightening path rather than focusing on maintaining the pledge for an accommodative policy. Chief Powell also announced that starting next January, he will be offering press conferences after each meeting, which opens doors for action in every single meeting and not just those considered "live ones." Despite overall hawkish, the outcome was no surprise for market players and in the short-term, investors preferred to sell the greenback, in the hopes that the ECB will make a more impressive announcement.
The ECB actually gave its first words on trimming QE, something that the market was waiting for long, but with multiple dovish accents that only highlighted the imbalances between both central banks and resulted in the EUR/USD pair nose-diving over 200 pips in a day. The European Central Bank announced that from the current 30B monthly purchases, will go with 15B between October and December when QE will probably end if conditions are granted. Draghi added in his statement that despite QE may soon end, a rate hike is out of the table at least through the summer of 2019, something quite disappointing for those hoping for a sooner normalization. Growth projections were cut, although they raised its inflation forecast for this year and the next just modestly, up to 1.7%. A hawkish Fed and a dovish ECB was the formula that drove the EUR/USD pair down to 1.1542 from 1.1851 this week.
The upcoming week will have nothing as relevant to offer, with the most relevant macroeconomic releases being the preliminary June PMI for the EU and the US. Trade war-related issues will likely be more relevant.
EUR/USD technical outlook
The EUR/USD pair surged to 1.1851, a couple of pips below the 38.2% retracement of its previous weekly slump before resuming its decline, now dangerously close to the yearly low of 1.1509. The weekly chart shows that the 100 and 200 SMA converge at around 1.1420, a probable target on a break lower, while technical indicators resumed their declines, now challenging their previous multi-year lows. Below 1.1420, the next relevant support is the 1.1240/60 price zone.
In the daily chart, the pair is back below a bearish 20 SMA, and far below the 100 and 200 SMA, while technical indicators are back into negative territory, the Momentum heading firmly lower and the RSI actually decelerating, but anyway at 36. Overall, the pair is set to extend its decline to fresh 2018 lows, with the downward momentum losing potential on a recovery above 1.1715, the 23.6% retracement of the mentioned decline.
EUR/USD Sentiment Poll
The FXStreet Forex Poll shows a clear fall in sentiment over the past week, with all three timeframes turning down. The next week and the month carry bearish expectations, 1.1578 and 1.1610 respectively. However, for the next three months, a turnaround is on the cards according to the poll with an average forecast of 1.1768.
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