EUR/USD Forecast: Downside appears limited for the time being

EUR/USD has gone into a consolidation phase following last week's decline.
Investors reassess ECB's policy outlook after mixed inflation data.
Near-term technical outlook shows that buyers remain on the sidelines.

Eren Sengezer FXStreet

EUR/USD has started to fluctuate in a very tight range above 1.0400 on Monday after having closed the previous week in negative territory. In the absence of high-tier macroeconomic data releases, the pair could find it difficult to make a decisive move in either direction in the near term.

The data published by Eurostat on Friday revealed that annual inflation, as measured by the Harmonised Index of Consumer Prices (HICP), climbed to 8.6% in June from 8.1% in May. The Core HICP, however, declined unexpectedly to 3.7% in the same period, compared to the market expectation of 3.9%.

Investors are trying to figure out whether or not the European Central Bank (ECB) will hike its policy rate by 50 basis points (bps) in July. Mixed inflation data and growing signs of a slowdown in the euro area could cause the ECB to remain cautious with regard to policy tightening. In an interview with Bloomberg over the weekend, Governing Council member Madis Muller said it would be appropriate to raise the policy rate by 25 bps in July and follow it up with a 50 bps hike in September.

In the meantime, the sharp drop witnessed in the US Treasury bond yields after the disappointing ISM Manufacturing PMI data limited the dollar's gains and helped EUR/USD find support.

Stock and bond markets in the US will be closed in observance of the Independence Day holiday and EUR/USD's trading action is likely to remain subdued.

EUR/USD Technical Analysis

EUR/USD's near-term technical outlook suggests that the bearish bias stays intact with the Relative Strength Index (RSI) indicator on the four-hour chart staying below 50. Additionally, the pair continues to trade below the 20-period SMA.

On the upside, 1.0440 (static level, 20-period SMA) forms interim resistance ahead of 1.0470 (Fibonacci 23.6% retracement of the latest downtrend) and 1.0500 (psychological level, 100-period SMA). Initial support is located at 1.0400 before 1.0380 (static level) and 1.0360 (static level).

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Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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