EUR/USD Forecast: Why the euro is set to enjoy a (temporary) bounce at the double-bottom

US economic cooldown? The old continent looks even colder, even in mid-summer. However, EUR/USD may have a bottom – at least a temporary one. 

With the exception of the yen, the dollar has been able to hold onto its gains – and even extend them – despite a substantial drop in US bond yields. Returns on 10-year Treasuries hit 1.35% on Tuesday, the lowest since February when America struggled with a considerable COVID-19 wave. Is the correlation between yields and the dollar broken? Not so fast.

The trigger to rushing into safe-haven US debt was the disappointing ISM Services Purchasing Managers' Index, which hit 60.1, far worse than 63.4 expected. However, everything is relative.

First, the score still reflects robust growth in America's largest sector. Secondly, the US expansion still leads the world and it outshines Europe's slower recovery. Germany's ZEW Economic Sentiment figures for July came out mixed on Tuesday and Wednesday's publication of Geman Industrial Production also disappointed with a drop of 0.3%. 

Will this trend continue? Perhaps it is time for a breather, perhaps solely by lower US yields – they could come to haunt the greenback against other currencies. Looking ahead, the Federal Reserve's Meeting Minutes from the June meeting could also weigh on the greenback.

Three weeks ago, the Fed stunned markets by saying that the debate about tapering down bond buys has begun and by signaling two rate hikes in 2023. That hawkish narrative may now be watered down when the protocols from that encounter are published. The minutes – revised until the publication – tend to balance out the original message. 

FOMC June Minutes Preview: A view of the Jackson Hole agenda

Returning to the old continent, the rapid spread of the Delta variant in Spain and elsewhere threatens to slow the economic recovery. Europe is lagging behind its peers in vaccinating its population and may suffer a downbeat summer.

However, the European Commission publishes its updated economic forecasts, and they could include an upgrade. Compared with the previous release, the immunization campaign has substantially picked up. That could boost the euro.

Is such a potential bounce set to turn into a EUR/USD rally? It is hard to tell, especially as the European Central Bank is locked in a long debate about its strategy. It is unclear what would come out of it, and even if the talks conclude on Thursday. 

See ECB Special Meeting Preview: Three potential EUR/USD movers to watch

Overall, Wednesday could see a recovery in the world's most popular currency pair.

EUR/USD Technical Analysis

Euro/dollar is still suffering from mild downside momentum on the four-hour chart and trades below the 50, 100 and 200 simple moving averages on the four-hour chart. Nevertheless, it has bounced off the previous multi-month low of 1.1808– creating a double-bottom that could serve as a launching pad for gains.

Below 1.1808, the next support lines are at 1.1760, 1.17 and 1.1650. All played a role early in the spring. 

Resistance is at 1.1825, the daily peak, followed by 1.1885, which was a swing high earlier in the week. Further above, 1.1910 and 1.1950 await bulls. 

See What yield drop ahead of Fed minutes means for the dollar