EUR/USD Forecast: Hopes overshadow it all

It was a tough week for the greenback, and safe havens in general, as the market moved past the coronavirus pandemic, despite it’s far from over. Economic reopenings in the Union without signs of a re-escalation in contagions or deaths awakened appetite for riskier assets, amid hopes for economic recoveries.  The ECB’s decision to expand its stimulus program further underpinned high yieldings.

Focus moves off the pandemic

The European Central Bank expanded its Pandemic Emergency Purchase Program by €600 billion to a total of €1,350 billion. “Unprecedented contraction,” according to President’s Lagarde, was the main reason behind the decision, as the coronavirus crisis has worsened inflation and growth outlooks. The horizon for net purchases under the PEPP will be extended to at least the end of June 2021, or until the Governing Council judges that the crisis is over. Policymakers expected real GDP to fall by 8.7% this year, and rebound by 5.2% in 2021. As per inflation, it was downwardly revised to 0.3% this year, and to 0.8% for the next one.

Also, Germany announced a €130 billion stimulus package to boost the local economy. The package includes several measures, including the main value-added tax rate cut from 19% to 16% and the reduced rate from 7% to 5% for six months, starting 1 July. Municipalities in debt are to receive financial aid from the federal government, families will receive  €300 for each child, and those who purchase electric cars will get a government rebate. The country is determined to uplift consumption spending.

Meanwhile, in the US the focus also shifted away from the pandemic, but for the wrong reasons. The death of a black citizen in the hands of a policy officer unwound unrest throughout the country. Protests turned into riots and looting, and US President Trump threatened to send the military to put a halt to the chaos. Things cooled down as the week went by, although tensions remain.  On a positive note, the New York state confirmed there were no coronavirus deaths in the last 24 hours for the first time since early March. The situation, however, is uneven as Florida reported a large increase in cases. Still, the news is encouraging towards economic reopenings.

A shockingly positive US Nonfarm Payroll report had a limited impact on the pair. According to it, the US added 2.5 million jobs in May, against expectations of -8 million. The unemployment rate surged to 13.3%, much better than the 19.8% expected while the Labor Force Participation Rate increased to 60.8%.  Wall Street soared with the headline, lending support to the high-yielding EUR.

Market ignores lagging data

With speculative interest fully concentrated in economic recoveries, data from these last few months have been pretty much ignored. Markit reported the final versions of its May Services PMIs and Manufacturing PMIs for the Union and the US, which bounced from record lows, although continued to signal a steep economic contraction.  Those indicators related to industrial activity and sales came in slightly better than anticipated but showing sharp falls amid the stalemate related to lockdowns.  Hopes are that a bounce may start in the third quarter of the year, which means that negative figures will be taken with a lighter tone, while any sign of economic recovery will surely boost sentiment.

The upcoming week start with the EU June Sentix Investor Confidence, foreseen at -56.3 from -41.8 previously, and the final reading of the Q1  Gross Domestic Product for the Union, expected to be confirmed at -3.8%.  By the end of the week, the US will publish the preliminary estimate of the Michigan Consumer Sentiment Index, seen bouncing from 72.3 to 75.

The macroeconomic calendar includes German Industrial Production and Trade Balance, but for April, which means that the figures will get little attention. The US will unveil May inflation data, and the usual weekly unemployment figures and their impact on price action could also be overshadowed by sentiment.

EUR/USD technical outlook

The EUR/USD pair trades above the 1.1300 level, up for a third consecutive week and at levels last seen three months ago. The weekly chart shows that it has surpassed its 100 SMA for the first time since October 2018, although the rally stalled at around the 200 SMA. Technical indicators have reached yearly highs, holding nearby with uneven strength.

In the daily chart, the pair is marginally lower after advancing for eight straight days, but posted yet another higher high and a higher low, in line with a bullish extension. The 20 DMA heads firmly north above the 100 DMA and nearing the 200 DMA, with a break above this last confirming further long-term gains. Technical indicators, in the meantime, ease within overbought readings, rather reflecting the ongoing correction than suggesting an upcoming decline.

The pair hit 1.1383 this Friday, the level to surpass to see it extending its gains to 1.1460 a long term static resistance level. A break beyond this last will take more than just upbeat market mood, and if the level is reached, it could be a nice inflexion point from where speculative interest could take profits to a larger extent.

The 1.1240 price zone is the first relevant support ahead of 1.1160. If the pair losses this last, it would mean that the corrective decline is already underway and that the pair may approach the 1.1000 level.

 EUR/USD sentiment poll

The FXStreet Forecast Poll indicates that investors were not expecting the latest advance. The sentiment is bearish in all the time-frame under study, with an average target of 1.1300 for the weekly perspective, and the pair seen returning to 1.10 in the longer run. In the monthly and quarterly views, over 70% of the polled experts see the pair falling.

The moving averages in the Overview chart show that the bullish momentum fades as time goes by, but the larger one is flat, rather a sign of caution than an indicator of upward exhaustion. The latest bullish breakout catch many off guard. A clearer picture will likely surge next week.

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