EUR/USD Forecast: Showing its strength, and may surge to new highs in response to US GDP

A double-digit contraction in the largest economy? Not a problem for the euro – which is showing its strength after Germany reported a  fall of 10.1% quarterly in the second quarter, and -11.7% annually, both below expectations. 

Perhaps the common currency is benefiting from upbeat employment figures in Germany – the number of unemployed dropped by 18,000 compared with an expected increase.

More importantly, markets could be seeing through data related to the worst days of coronavirus and are encouraged by Europe's emergence from the pandemic. While some countries – including Germany – are experiencing flareups, the situation is under control. 

That contrasts with the US, where the daily death toll continues rising, hitting a high of over 1,400. The caseload has stabilized, yet at an elevated rate of around 70,000. 

Investors have gotten used to reading depressing COVID-19 developments in America, but the acknowledgment of the worsening situation from the central bank still weighed on sentiment. The Federal Reserve left its policy unchanged but expressed concerns about the impact of the virus.

Jerome Powell, Chairman of the Federal Reserve, said that high-frequency data is showing economic softening since the coronavirus cases began rising in mid-June. While he committed to using all available tools, he was short on detail and left that to after the Fed completes a review process.

See FOMC and Chairman Powell: Doing the Covid limbo

The dollar initially dropped, sending EUR/USD to a peak of 1.1806, but the move proved short-lived. It seems that Powell is pressing politicians to act first – federal unemployment benefits expire on Friday. Millions of jobless Americans are set to lose their $600/week top-up and consumption may drop – further hurting the economy. 

Weekly jobless claims are set to show an ongoing worrying situation in America's labor market, but these figures will likely compete with the first read of GDP for the second quarter. Economists foresee a crash of 34.1% annualized – the worst on record. It is essential to note that estimates are within a broad range and high volatility is likely. 

See US Q2 GDP Preview: Are there any shocks left?

Markets may shrug off an upbeat data – seeing the data as stale – or react negatively to adverse figures, assuming the weak second quarter is preceding an even worse third quarter. 

All in all, it may be a lose-lose situation for the dollar, allowing EUR/USD to rise. 

EUR/USD Technical Analysis

Momentum on the four-hour chart remains positive despite some softening, and the Relative Strength Index is below 70 – outside overbought conditions. Euro/dollar continues trading above the 50, 100, and 200 Simple Moving Averages, and it continues setting higher highs and higher lows – all bullish signs. 

Initial resistance awaits at 1.1780, a high point early in the week. It is followed by the new 22-month high of 1.1806. The next lines to watch are 1.1820 and 1.1850.

Support is at 1.17, that cushioned EUR/USD this week, followed by 1.1625, which capped it last week. Further down, 1.1540 and 1.1505 are eyed.