EUR/USD Forecast: Overbought, so what? Three reasons to expect more gains (apart from the Fed)

  • EUR/USD has resumed its gains and may benefit from end-of-month flows.
  • Robust eurozone inflation could boost the common currency.
  • Weak US consumer confidence may weigh on the dollar.

"Markets can stay irrational longer than you can remain solvent" – the words of famous economist John Maynard Keynes apply to EUR/USD as August draws to a close. Irrationality is oversold conditions on the four-hour chart – but these upward moves seem justified.

The underlying boost for the currency pair is the dollar's downside driver – dovishness from the Federal Reserve, which is in no rush to taper its bond buys. The echoes of Fed Chair Jerome Powell's speech from Friday are heard loud and clear.

See Powell Analysis: Dove defeats the dollar, without a strong NFP, forget about tapering

He only "thought" tapering down the bank's $120 billion/month bond-buying scheme is warranted, but seems unsure due to the spread of the Delta COVID-19 variant. Only a strong Nonfarm Payrolls report on Friday could change that impression. On Tuesday, there are other factors that could boost EUR/USD. 

1) End-of-month flows: Money managers are rushing to adjust their portfolios as August draws to a close. While EUR/USD rose over 150 pips from the 1.1660 trough, it remains down on the month. If there is room for a monthly correction, it is to the upside – in line with the current Fed-driven trend.

2) Strong eurozone inflation: Are price rises reaching the old continent? Inflation-averse Germans are beginning to worry after their country reported an annual increase of 3.4% YoY on Monday. Early on Tuesday, France's figure hit 2.4% YoY, above expectations. Estimates for the entire currency bloc stand at 2.7%, but the releases from individual countries point to the upside.

Core inflation is projected to double from 0.7% to 1.5%. Any such developments could embolden the hawks on the European Central Bank and raise demands for reducing the institution's bond-buying scheme. That would be euro-positive. 

3) Downbeat US consumer? Perhaps one of the reasons that pushed Powell to refrain from committing to tapering came from the shockingly low Consumer Sentiment Index from the University of Michigan. The score of 70.3 was the lowest since 2011 – below the pandemic bottom.

Conference Board Consumer Confidence August Preview: Negative dollar risks

On Tuesday, the Conference Board publishes its gauge of consumer confidence, and a fall could serve as a reminder to investors – the Fed is here to print dollars. Depressed sentiment among shoppers is correlated with lower spending.

Overall, fundamentals are pointing lower. 

EUR/USD Technical Analysis

As mentioned earlier, the four-hour chart is pointing to overbought conditions – the Relative Strength Index (RSI) is above 70. Euro/dollar's sharp maintains momentum to the upside and sets the price well above the 50, 100 and 200 Simple Moving Averages. All in all, technicals point to a temporary downside correction. 

The next resistance line is 1.1860, which capped the pair in early August. It if followed by 1.1910, a peak in late July, and then by 1.1950 and 1.1980.

Support awaits at 1.1810, Monday's peak, and then by 1.1780, which held EUR/USD down last week. Further down, 1.1740 and 1.1725 await. 

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