EUR/USD Forecast: Delta depression, ECB dovishness set to weigh on euro

Heads bears win, tails bulls lose – the highly transmissible Delta coronavirus variant is spreading on both sides of the Atlantic, but it for EUR/USD, it clearly means a downside move. Why? 

The euro had been benefiting from the pickup in Europe's vaccination scheme and the gradual reopening ahead of the summer. Catching up on immunization meant an increase in the common currency's value. However, the recent outbreak poses a risk and threatens to ruin holidays at the beach. 

After Spain and Portugal led the upswing, the Netherlands reported a leap of 800% in coronavirus cases, and French President Emmanual Macron is set to address the nation. With most of the vulnerable population already vaccinated – and jabbing moving fast – this wave will likely have a more limited impact on hospitals and may be short-lived. Nevertheless, it is a setback.

On the other side of the pond, infections are up against some 60% in America. As it comes from a low base and is limited to specific parts of smaller states, for now, markets are not paying full attention. That may change and support the dollar. Why? The greenback is a safe haven sought in times of trouble. Overall, Delta is a win-win for the dollar. 

See Delta Doom is set to storm America, the dollar could emerge as top dog

Source: FT

At least on Monday, EUR/USD may also suffer from the divergence in monetary policy. European Central Bank President Christine Lagarde gave an interview over the weekend, saying that forward guidance will change in the upcoming July 22 meeting, as part of the ECB's new framework. More importantly, Lagarde hinted that the bank's bond-buying scheme could be extended beyond March 2022, albeit in a new format.

These are far clearer words than her message on Thursday when she presented the ECB's new policy and point to more support for longer – euro negative. She also dismissed any words about withdrawing stimulus. 

Lagarde's US counterpart Jerome Powell, Chair of the Federal Reserve, will testify on Wednesday amid growing uncertainty about the US economy. Recent figures such as jobless claims and business surveys have been somewhat weaker than expected.

Ahead of his public appearance, inflation data for June is awaited on Tuesday. The economic calendar is pointing to softer price rises, potentially allowing the dollar to fall. However, that may wait for Tuesday, while the greenback potentially gains ground on Monday. 

US Consumer Price Index June Preview: Has inflation peaked?

Overall., EUR/USD has room to extend its falls at the beginning of the new week.

EUR/USD Technical Analysis

Momentum on the four-hour chart has turned positive, but euro/dollar remains has failed to top the 100 Simple Moving Average. It is sliding toward the 50 SMA, which hits that price at 1.1848 at the time of writing.

Further support awaits at 1.1825, a support line from last week, followed by 1.1808, a cushion from early in the month. The multi-month trough of 1.1781 is next.

Some resistance is at 1.1880, the daily high, followed by 1.1890, which was a swing high last week. Further above, 1.19 awaits EUR/USD bulls.