EUR/USD Forecast: Powell-powered recovery set to continue, levels to watch

"Still a ways off" – these words by Federal Reserve Chair Jerome Powell have resulted in a lift-off for EUR/USD, or more precisely, a slide of the dollar. The world's most powerful central banker has told members of a House committee that the economy is still far from making "substantial that would warrant reducing the Fed's current $120 billion/month bond-buying scheme. More dollars printed mean a weaker currency. 

Moreover, Powell dismissed surprisingly strong inflation figures as transitory. The headline Consumer Price Index hit 5.4% YoY in June, yet it was driven by costs of used vehicles, car rentals, airfares, hotel stays and apparel – all related to the rapid reopening. He did expect inflation to remain elevated for a few more months, but to drop later on. 

The Fed Chair's prepared remarks came out just the US released producer price statistics for June, which smashed estimates with monthly increases of 1% on both the headline and the core figures. 

Will the dollar greenback extended its grind? Powell is slated to appear before a Senate committee later in the day, and he could keep the pressure going. Investors will also eye weekly jobless claims and two manufacturing surveys released by the Fed – one for the New York region and the other for Philadelphia. 

Perhaps more importantly, the focus on Capitol Hill remains of importance as discussions about a $3.5 trillion infrastructure bill agreed by a wide group of Democrats is high on the agenda. Will conservative members such as Senator Joe Manchin back the deal?

If progress is made, the dollar could gain on prospects of higher inflation and thus rate hikes coming sooner rather than later. However, if politicians bicker, the greenback could decline. Less government spending means depressed bond issuance – and a potential drop in Treasury yields could weigh on the dollar. At least for Wednesday, there is little chance for a breakthrough, potentially weighing on the greenback.

Another factor that could temporarily weigh on the greenback comes from the rapid spread of the Delta covid variant. Cases continue rising in Europe, weighing on the euro. The same is happening in the US and – while it may eventually have a positive impact on the dollar – Powell could respond by warning of its negative impact on the economy, thus weighing on the greenback. 

Source: FT

Overall, there is room for EUR/USD to extend its gains.

EUR/USD Technical Analysis

Euro/dollar has surpassed the 50 Simple Moving Average on the four-hour chart and downside momentum is diminishing. However, the currency pair still trades below the 100 and 200 SMAs. 

Some resistance is at 1.1860, where the 100 SMA hits the price. It is followed by 1.1880, a stubborn cap, and the by 1.19 and 1.1950.

Support awaits at 1.1825, which cushioned EUR/USD in recent days, then by 1.1775, the multi-month low. The next level to watch is 1.1740.