EUR/USD Forecast: USD firmly higher heading into relevant inflation and employment data

• EUR/USD bearish trend to continue at least for one more week. 1.1400 becoming a likely target in a 1-month view.
• EU and  German CPI, US core PCE index and Nonfarm Payrolls anticipate another active week.

The EUR/USD pair is down for a sixth consecutive week, and as it has been happening lately, is not about the dollar, but about the common currency. Indeed, the greenback has lost part of its attractive, following re-escalating tensions between the US and China and North Korea, not to mention Treasury yields that retreated sharply from multi-year highs, with the 10-year note benchmark comfortable below 3.0%.

The Minutes from the latest FOMC's monetary policy meeting also put a halt to dollar's appreciation, as despite the hawkish stance on rates and inflation, policymakers reminded market players that they are now more willing with inflation "modestly overshooting," above their 2.0% target. The document hinted an upcoming rate hike next June, as most officers believed a rate hike will be appropriate soon, but gave no indication of what's next, nor if they pretend to speed up the pace of interest rate increases.

In Europe, things are not doing better, as business activity slowed for a fourth consecutive month in May, according to the preliminary May Markit PMI released this week. The Composite index, fell to 54.1 in May from 55.1 in April, the lowest reading for 18 months, while Consumer Confidence in the region, as measured by the European Commission, shrunk by more than expected, currently at 0.2.  German Q1 GDP was confirmed at 0.3%, well below the 0.6% growth of the final quarter of 2017, in line with EU data which indicates that the growing momentum in the region has decelerated.

The ECB Monetary Policy Meeting's Accounts showed that policymakers are confident on economic growth, but at the same time concerned about protectionism, and the risk it poses to the euro area. "Uncertainty around the outlook has increased," and therefore, caution is needed. A dovish stance that indicates the central bank is in no hurry to change its current monetary stance.

Political jitters also had their good fare of culpability on EUR's decline as Italian new government poses a new risk to the Union, planning to raise public spending and tax cuts, and even proposing to reform the single market to “avoid prejudicial effects on national interests”. In Spain, the socialist party had said that it would put forward a motion of no confidence against PM Rajoy over a graft case involving members of his party, with Rajoy responding with a televised statement that such move will hurt the economic recovery.

The upcoming week will shed more light over what the ECB will do in the foreseeable future, with May preliminary inflation figures for Germany and the Union. Market's forecasts are pointing to modest improvements in both, but the EU core yearly CPI is seen at 1.0% from previous 0.7%, well below the central bank's target.

In the US, April's core PCE inflation, scheduled for next Thursday, will give clues on US inflation, although the recently added "symmetric" concept to inflation may lesser the usual effect of the report. The all mighty Nonfarm Payrolls report will be out next Friday. The US economy is expected to have added around 185K new jobs in May, while the unemployment rate is anticipated to have remained unchanged at 3.9%. Wages are seen marginally higher from April's soft reading, nothing that can mean increasing inflationary pressures.

 

EUR/USD technical outlook

The EUR/USD is not only sharply down for a sixth consecutive week, at also at levels last seen in November 2017. Dollar's rally is quite overstretched, but there are no technical signs that such advance may come to an end.

In the weekly chart, technical indicators maintain their strong bearish slopes, nearing oversold readings and at their lowest since November 2016, while the 20 SMA turns lower, over 700 pips above the current level, and the 100 and 200 SMA keep shrinking the distance between each other, both around 1.1400, a level that could become a possible target on a break below 1.1554, November 2017 monthly low. In the daily chart, the 20 DMA keeps leading the way lower, heading south far below the larger ones, while technical indicators present a neutral-to-bearish stance, the Momentum well below its mid-line, and the RSI at extreme oversold readings.

Overall, the risk is leaned to the downside, but investors may become more cautious after the pair lost roughly 900 pips pretty much straight. Corrections are more likely, but won't automatically mean a bottom has been reached. Resistances, from the current level, are located at 1.1710, followed by 1.1830, the weekly high. Gains beyond this last next week are quite unlikely, unless US data disappoints big, and even then.

 

EUR/USD sentiment poll

The FXStreet Sentiment Forecast Poll indicates that market players believe the greenback will continue rallying, at least next week. For the bigger time frames, the American currency is seen easing, although seems more related to a cautious stance amid the length of its latest rally, as the average targets in a one-month view are not far away from the current levels. In the weekly perspective, bears account for a 48%, slightly above last week's 40%.  For the monthly view, bulls increased to 61% from 52% previously, although the average target has been downgraded from 1.1920 to 1.1843. Quarterly basis, the pair is still seen averaging 1.2000, which will represent less than a 50% correction of the latest weekly slump.

Sentiment toward the common currency has continued to deteriorate according to the moving averages in the Overview chart, as in the three time frames under study, the trend is still bearish, with the largest accumulation of targets pointing to 1.1400 in a month. The range of possible targets is still quite wide in the 3-month view, from 1.08 to 1.29, a sign of longer-term uncertainty, on whether the ongoing dollar's rally can continue without looking back.