EUR/USD Forecast: Euro struggles to gather strength as ECB rate hike bets retreat

EUR/USD has steadied above 1.0500 following Thursday's drop.
Markets scale down year-end ECB rate hike expectations.
Investors await New Home Sales and UoM Consumer Sentiment Index data from the US.

Eren Sengezer FXStreet

EUR/USD has gone into a consolidation phase above 1.0500 after having snapped a three-day winning streak on Thursday. The shared currency is having a hard time finding demand as investors reassess the European Central Bank's (ECB) policy outlook.

The disappointing PMI data from the euro area and Germany revived concerns over a recession in Europe. The latest positioning shows that markets are now pricing in a total of less-than-150 bps ECB rate hikes by the end of the year, compared to 170 bps earlier in the week.

ECB Governing Council member Joachim Nagel argued on Thursday that the ECB would have to opt for large rate hikes if its policy were to fall behind the curve and added that economic costs would be much bigger in that scenario. Nevertheless, these comments failed to support the shared currency.

Meanwhile, the IFO's Business Climate Index for Germany edged lower to 92.3 in June from 93 in May. Commenting on the data, “the worry lines in the German economy are getting bigger," IFO Economist Klaus Wohlrabe said.

On the other hand, the dollar is struggling to gather bullish momentum amid worrying signs of an economic slowdown in the US. Although FOMC Chairman Jerome Powell expects growth in 2022 to be "fairly strong," market participants refrain from betting on further dollar strength, at least for now. Ahead of the weekend, New Home Sales for May will be featured in the US economic docket. In April, New Home Sales declined by 16.6% and a similarly significant decline in May could trigger a flight to safety and help the greenback end the week on a firm footing.

EUR/USD Technical Analysis

The near-term technical outlook highlights EUR/USD's indecisiveness with the Relative Strength Index (RSI) indicator on the four-hour chart continuing to move sideways near 50.

On the downside, 1.0500 (50-period SMA) aligns as dynamic support ahead of 1.0470 (Fibonacci 23.6% retracement of the latest downtrend) and 1.0400 (psychological level).

Resistances are located at 1.0560 (Fibonacci 50% retracement), 1.0580 (100-period SMA, 200-period SMA) and 1.0600 (Fibonacci 61.8% retracement, psychological 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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