EUR/USD Forecast: Sellers poised to challenge a critical support level
|EUR/USD Current Price: 1.0768
- European PMIs failed to impress amid divergences in demand for goods and services.
- Concerns mount about the US debt ceiling and the Fed’s monetary policy.
- EUR/USD turned firmly bearish and could accelerate its decline once below 1.0745.
The EUR/USD pair eased towards 1.0764 on Tuesday as dismal European data undermined the market mood, while negotiations above an extension of the United States (US) debt ceiling continue one week ahead of the deadline.
S&P Global published the preliminary estimates of the May PMIs for the Eurozone. There was a nice improvement in the services sector, as the German services index improved to 57.8, while the EU one printed at 55.9, both beating expectations. However, manufacturing output contracted by more than anticipated. “The strong growth in the service sector contrasted with an accelerated decline in industrial production, which in turn reflects the increasing divergence in demand for goods and services,” notes the official release, indicating divergences in price action.
Meanwhile in the US, President Joe Biden and House Speaker Kevin McCarthy commented their Monday meeting was “productive,” although a deal is not yet on the table. US lawmakers need to clinch a deal before June 1st to avoid a default, according to Treasury Secretary Janet Yellen.
Finally, speculative interest is trying to assess Federal Reserve (Fed) officials’ comments, as mixed signals came from that front. Following the latest Fed decision, market players rushed to price in a pause in rate hikes in June and July and a rate cut coming in September. However, policymakers are working on cooling down such expectations, most noting they are not yet done with hikes. The Federal Open Market Committee (FOMC) Minutes will be out on Wednesday and could shed some light on the matter.
Financial markets reflect mounting tensions. Asian and European indexes trade in the red, while Wall Street is set to open with modest losses. At the same time, Treasury yields are up, with the 2-year note currently offering 4.38%, its highest in two months.
The American session will bring the May preliminary S&P Global PMIs, foreseen holding within expansion levels but declining from April’s final readings. The country will publish April New Home Sales and the May Richmond Fed Manufacturing Index.
EUR/USD short-term technical outlook
The EUR/USD pair trades near its daily low as the US Dollar advances against most major rivals. Technical readings in the daily chart favor a bearish extension. The pair is meeting sellers around a directionless 100 Simple Moving Average (SMA) for a third consecutive day, while the 20 SMA gains downward traction above it. At the same time, the Momentum indicator heads firmly south within negative levels and at fresh multi-week lows, while the Relative Strength Index (RSI) indicator also heads south at around 37.
The risk skews to the downside in the near term. The 4-hour chart shows EUR/USD finally fell below a bearish 20 SMA after seesawing around the level for two consecutive days. At the same time, the 100 SMA extends its slide below the 200 SMA, both over 100 pips above the current level. Finally, the Momentum indicator rotated south but stands within neutral levels, although the RSI heads lower almost vertically at around 36.
The pair has an immediate support level at 1.0745, the 61.8% retracement of the 2022 yearly decline. Large stops likely accumulate below the level and once triggered, the US Dollar can accelerate its advance. On the other hand, sellers will probably add on approaches to the 1.0800 threshold.
Support levels: 1.0745 1.0700 1.0660
Resistance levels: 1.0795 1.0850 1.0895
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