EUR/USD Outlook: Bears have the upper hand near two-month low ahead of FOMC Minutes
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UNLOCK OFFER- EUR/USD gains some positive traction on Wednesday, though the upside seems limited.
- A modest USD pullback from a two-month high is seen lending some support to the pair.
- Hawkish Fed expectations to act as a tailwind for the USD ahead of the FOMC Minutes.
The EUR/USD pair edges higher during the Asian session on Wednesday, partly recovering from the previous day's losses to the 1.0760 area, or its lowest level since March 27. The US Dollar (USD) eases from a fresh two-month high touched on Tuesday and turns out to be a key factor acting as a tailwind for the major. Apart from this, firming expectations for more interest-rate hikes by the European Central Bank (ECB) in the coming months lend additional support to the shared currency. In fact, money markets are pricing in additional two 25 basis points (bps) rate hikes as bets were lifted by the recent remarks by ECB President Christine Lagarde, who said that the journey toward bringing inflation back to the target isn't over yet. The upside for the pair, however, seems limited, at least for now, amid worrying signs of slowing global growth and the underlying bullish sentiment surrounding the Greenback.
The flash reading of the Eurozone PMI released on Tuesday showed that overall business activity slowed slightly more than anticipated as the dominant services sector lost a little of its shine and the downturn among manufacturers deepened in May. This comes on the back of softer Chinese macro data last week, which indicated that the world's second-largest economy underperformed in May and fueled recession fears. This, along with the lack of progress in talks over increasing the US debt ceiling, continue to weigh on investors' sentiment and could benefit the safe-haven buck. Representatives of President Joe Biden and congressional Republicans ended another round of debt-ceiling talks without an agreement to raise the government's borrowing limit. Apart from this, the possibility of further rate hikes by the Federal Reserve (Fed) favours the USD bulls and contributes to capping the EUR/USD pair.
Despite Fed Chair Jerome Powell's less-hawkish remarks last Friday, investors seem convinced that the US central bank will keep interest rates higher for longer. These expectations were reaffirmed by a more-hawkish tilt by several Fed officials this week, with markets now pricing in almost a 30% chance of another 25 bps lift-off in June. This remains supportive of elevated US Treasury bond yields, which, along with the better-than-expected US macro data released on Tuesday, supports prospects for the emergence of some USD dip-buying. In fact, the S&P Global's Composite PMI rose to 54.5 in May from 53.4 in April, suggesting that business activity in the US private sector expanded at a faster pace in early May. Furthermore, sales of new US single-family homes jumped to a 13-month high in April. Hence, it will be prudent to wait for strong follow-through buying before positioning for any further intraday gains for the EUR/USD pair.
Traders might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the FOMC minutes, due later during the US session this Wednesday. The minutes will be closely scrutinized for fresh clues about the Fed's next policy move, which, in turn, will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the EUR/USD pair. In the meantime, the release of the German Ifo Business Climate index could allow traders to grab short-term opportunities around the major.
Technical Outlook
From a technical perspective, repeated failures to move back above the 100-day Simple Moving Average (SMA) and the overnight slide favours bearish traders. Moreover, oscillators on the daily chart are holding in the negative territory and are still far from being in the oversold zone. This, in turn, suggests that the path of least resistance for spot prices is to the downside and supports prospects for a further near-term depreciating move. That said, it will still be prudent to wait for some follow-through selling below the 1.0760 area, which is closely followed by the 61.8% Fibonacci retracement level of the March-May rally, around the 1.0735 zone, before placing fresh bearish bets. The EUR/USD pair might then slide below the 1.0700 mark and test the next relevant support near the 1.0675-1.0670 horizontal zone before eventually dropping to the 1.0635 region en route to the 1.0600 round figure.
On the flip side, the 1.0800-1.0810 confluence – comprising the 100-day SMA and the 50% Fibo. level – now seems to act as an immediate hurdle. This is followed by the 1.0840 horizontal resistance ahead of the 1.0870 region, or the 38.2% Fibo. level. A sustained strength beyond the latter will suggest that the recent downfall from over a one-year high has run its course and shift the bias back in favour of bullish traders. The EUR/USD pair might then climb further beyond the 1.0900 mark and aim to test the 1.0955-1.0960 support breakpoint, now turned resistance, which coincides with the 23.6% Fibo. level.
- EUR/USD gains some positive traction on Wednesday, though the upside seems limited.
- A modest USD pullback from a two-month high is seen lending some support to the pair.
- Hawkish Fed expectations to act as a tailwind for the USD ahead of the FOMC Minutes.
The EUR/USD pair edges higher during the Asian session on Wednesday, partly recovering from the previous day's losses to the 1.0760 area, or its lowest level since March 27. The US Dollar (USD) eases from a fresh two-month high touched on Tuesday and turns out to be a key factor acting as a tailwind for the major. Apart from this, firming expectations for more interest-rate hikes by the European Central Bank (ECB) in the coming months lend additional support to the shared currency. In fact, money markets are pricing in additional two 25 basis points (bps) rate hikes as bets were lifted by the recent remarks by ECB President Christine Lagarde, who said that the journey toward bringing inflation back to the target isn't over yet. The upside for the pair, however, seems limited, at least for now, amid worrying signs of slowing global growth and the underlying bullish sentiment surrounding the Greenback.
The flash reading of the Eurozone PMI released on Tuesday showed that overall business activity slowed slightly more than anticipated as the dominant services sector lost a little of its shine and the downturn among manufacturers deepened in May. This comes on the back of softer Chinese macro data last week, which indicated that the world's second-largest economy underperformed in May and fueled recession fears. This, along with the lack of progress in talks over increasing the US debt ceiling, continue to weigh on investors' sentiment and could benefit the safe-haven buck. Representatives of President Joe Biden and congressional Republicans ended another round of debt-ceiling talks without an agreement to raise the government's borrowing limit. Apart from this, the possibility of further rate hikes by the Federal Reserve (Fed) favours the USD bulls and contributes to capping the EUR/USD pair.
Despite Fed Chair Jerome Powell's less-hawkish remarks last Friday, investors seem convinced that the US central bank will keep interest rates higher for longer. These expectations were reaffirmed by a more-hawkish tilt by several Fed officials this week, with markets now pricing in almost a 30% chance of another 25 bps lift-off in June. This remains supportive of elevated US Treasury bond yields, which, along with the better-than-expected US macro data released on Tuesday, supports prospects for the emergence of some USD dip-buying. In fact, the S&P Global's Composite PMI rose to 54.5 in May from 53.4 in April, suggesting that business activity in the US private sector expanded at a faster pace in early May. Furthermore, sales of new US single-family homes jumped to a 13-month high in April. Hence, it will be prudent to wait for strong follow-through buying before positioning for any further intraday gains for the EUR/USD pair.
Traders might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the FOMC minutes, due later during the US session this Wednesday. The minutes will be closely scrutinized for fresh clues about the Fed's next policy move, which, in turn, will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the EUR/USD pair. In the meantime, the release of the German Ifo Business Climate index could allow traders to grab short-term opportunities around the major.
Technical Outlook
From a technical perspective, repeated failures to move back above the 100-day Simple Moving Average (SMA) and the overnight slide favours bearish traders. Moreover, oscillators on the daily chart are holding in the negative territory and are still far from being in the oversold zone. This, in turn, suggests that the path of least resistance for spot prices is to the downside and supports prospects for a further near-term depreciating move. That said, it will still be prudent to wait for some follow-through selling below the 1.0760 area, which is closely followed by the 61.8% Fibonacci retracement level of the March-May rally, around the 1.0735 zone, before placing fresh bearish bets. The EUR/USD pair might then slide below the 1.0700 mark and test the next relevant support near the 1.0675-1.0670 horizontal zone before eventually dropping to the 1.0635 region en route to the 1.0600 round figure.
On the flip side, the 1.0800-1.0810 confluence – comprising the 100-day SMA and the 50% Fibo. level – now seems to act as an immediate hurdle. This is followed by the 1.0840 horizontal resistance ahead of the 1.0870 region, or the 38.2% Fibo. level. A sustained strength beyond the latter will suggest that the recent downfall from over a one-year high has run its course and shift the bias back in favour of bullish traders. The EUR/USD pair might then climb further beyond the 1.0900 mark and aim to test the 1.0955-1.0960 support breakpoint, now turned resistance, which coincides with the 23.6% Fibo. level.
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