EUR/USD Forecast: European melancholy may erase the Powell-powered rally

What just happened: Powell-ed up

The ugly contest between central banks has been intensifying – with the Federal Reserve having the upper hand. Fed Chair Jerome Powell has opened the door to cutting interest rates by the end of the month – sending the dollar down. The world's most powerful central banker has said that the outlook has dimmed, that trade tensions are taking their toll on investment and even refused to label the labor market as "hot" – despite the unemployment rate persisting below 4%. 

Powell has also warned that low inflation may become entrenched – even as fresh Core Consumer Price Index data beat expectations with 2.1%. While he refrained from committing to cutting rates in the upcoming Fed meeting on July 31st – the FOMC Meeting Minutes from June have shown that "many" members have considered a reduction in rates – and as forecasts have dimmed since then – the first rate cut since 2008 is all but guaranteed.

The European Central Bank has fought back. Several members of the ECB such as France's Benoit Coeure have spoken in favor of taking immediate action. The meeting minutes from the Frankfurt-based institution's latest decision has also shown that members of the Governing Council seek to loosen policy.

And similar to the US, the most recent euro-zone figures have come out above expectations. German industrial output grew by 0.3% in May, and its final CPI for June was revised up from 1.3% to 1.5%. Nevertheless, the ECB seems keen on cutting rates.

Outside the world of central banks and economic figures, the US and China have resumed trade talks by holding a phone call between high-level representatives. The resumption of negotiations is the result of the summit between Presidents Donald Trump and Xi Jinping. Both sides have said that the call was "constructive" – but did not provide additional details.

Concerns about the health of German Chancellor Angela Merkel have intensified. The veteran leader is seen as a beacon of stability – and her third episode of trembling in public raises fears she may step down before the planned 2021 elections.

Euro-zone events: German ZEW and EU politics

The ECB is entering its "quiet period" – no comments on monetary policy – ahead of their all-important rate decision on July 25th. They are thus letting the data speak for itself. The German ZEW institution publishes its new economic sentiment survey for July. It is expected to bounce back from the depths of -21.1 seen in June – but remain negative and indicate ongoing pessimism among German businesses. Fears of a recession in the continent's powerhouse persist. 

Final inflation figures for the euro-zone for June are due on Wednesday. They may show an upward revision in headline inflation as Germany's final read was pushed higher. However, markets will pay more attention to any change in core inflation – which is of high interest to the ECB.

The European Parliament is set to approve the nomination of Ursula von der Leyen as the new EU Commission President. The German defense minister's designation to the highest post is part of a full package deal that includes the appointment of Christine Lagarde – currently Managing Director at the International Monetary Fund –  to head the ECB.

Lagarde's nomination has pushed the euro lower as she is seen as continuing Draghi's dovish policies. If parliament fails to approve Von Der Leyen to the EC, Lagarde's prospects may unravel as well – sending the euro higher. However, political analysts in Brussels foresee low chances of it happening. 

Here are the events lined up in the euro-zone on the forex calendar:

US events: Centered on the consumer

The US consumer kicks off the week with June's retail sales report. The top-tier figure completes the picture for the second quarter and shapes growth projections. Headline sales are set to rise at a more modest pace of 0.3% against 0.5% in May, and the all-important control group is set to repeat the satisfying 0.4% increase.

It is important to note that the previous report was far better than May's figures suggest as it included considerable upward revisions to April's data. Corrections should be followed closely in the upcoming release.

Housing starts and building permits tend to offset each other but if both numbers surprise in the same direction – either to the upside or to the downside – the dollar may move. The Fed's Beige Book – due precisely two weeks before the central bank decides – will likely show that the economy continues growing but at a slower rate. 

The Philadelphia Fed Manufacturing Index for July is set to shed light on the industry, but a significant beat or miss is needed to move the needle.

The final economic indicator of the week will likely have a substantial influence on prices. The University of Michigan's preliminary Consumer Sentiment Index for July will likely remain at high levels around 100 once again. 

Apart from data, the world's largest economies hold further trade talks and perhaps they may release additional details. The thorniest issues in previous rounds were enshrining intellectual property and other protections into Chinese law and forced transfer of technology.

Here are the scheduled events in the US:

EUR/USD Technical Analysis 

EUR/USD's technical picture has improved as momentum flipped back to positive and as the currency pair has recaptured the 50-day and 100-day Simple Moving Averages. The currency pair remains below the 200-day SMA, and the Relative Strength Index (RSI) is balanced. 

All in all, bulls lead over bears, but the margin is minor. 

Resistance awaits at 1.1285, which has capped EUR/USD in mid-July. It is followed by 1.1320 that held it down in early July and also in late April. The next line to watch is 1.1350 that separated ranges – serving as resistance in early June and support later on. The next cap is 1.1395, which held it down in late June and 1.1410 – the highest level since March.

Below the current battle line of 1.1245, significant support awaits in the 1.1180 to 1.1195 region. Both lines provided support in recent weeks. Further down, 1.1145 supported EUR/USD in May. It is followed by 1.1120, which was a temporary support line in early June and 1.1107 – the 2019 low.

EUR/USD Sentiment

Market enthusiasm from the Fed's upcoming rate cut may wane and make way for the nearer rate decision by the ECB. It seems that EUR/USD has room to pare its gains.

The FXStreet Poll is showing that experts see EUR/USD sliding in the short term and edging up upwards. However, it seems that recent low volatility has limited expectations for significant moves – the targets are all in the 1.12 handle. 

Related Forecasts

• GBP/USD Forecast: Trio of top-tier events to set next move after escaping the abyss
• USD/JPY Forecast: Focus on the consumer after the Fed foiled the recovery