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EUR/USD Weekly Forecast: End of the bullish run? FOMC Minutes to be a make it or break it

  • Easing US debt-ceiling concerns underpinned the mood and the US Dollar.
  • European and United States policymakers’ hawkish tone hints at potential surprises.
  • EUR/USD stands dangerously close to a long-term support level at 1.0745.

The EUR/USD pair edged lower for a second consecutive week and settled just above the 1.0800 level. Financial markets started the week in a down mood amid concerns related to the United States (US) debt-ceiling issues. A couple of weeks ago, US Treasury Secretary Janet Yellen warned that if Congress did not agree on an extension, the country will default as soon as June 1. Ever since, top Congressional lawmakers have engaged in negotiations, with progress coming only this week.

Following talks with President Joe Biden and other representatives, House Speaker Kevin McCarthy said on Thursday that a debt limit deal will be on the House floor next week, adding that he now sees a deal coming together. However, on Friday, GOP Debt Limit Negotiator Garret Graves reported that talks are at a pause, weighing on the market’s mood and on the Greenback.

Surprise surprise! More central banks’ hawkishness

At the same time, some Federal Reserve (Fed) officials surprised investors with hawkish comments. Dallas Fed´s President Lorie Logan noted that data at this time does not support skipping an interest rate hike at the next meeting in June. She added that the central bank still has work to do to achieve its goal of price stability. Policymakers are suggesting a decision on pausing has not been made yet.

European Central Bank (ECB) members were not behind.  Vice President Luis de Guindos noted this week that “inflation in services is the most worrying for the ECB,” adding there is still scope to keep raising rates. Finally, on Friday, ECB President Christine Lagarde said that  the “ECB will be courageous to take the decisions needed to bring inflation back to 2%” and noted the central bank still needs to have sustainably higher interest rates to combat inflation. On a positive note, the ECB’s monthly Economic Bulletin revealed that “wage pressures have strengthened further as employees recoup some of the purchasing power they have lost as a result of high inflation.”

Strong US Dollar despite a better mood

Surprisingly enough, the US Dollar remained strong throughout the week, despite a better market mood. The American currency pretty much ignored government bond yields’ action, also stock markets. USD strength was evident across the FX board, putting into doubt its bearish trend.

The Euro, on the other hand, remained subdued amid tepid local data. EU Industrial Production unexpectedly plummeted in March, down by 4.1% in the month and by 1.4% from a year earlier. Furthermore, the Q1 Gross Domestic Product (GDP) preliminary estimate posted a modest 0.1% growth, as expected. Finally, the Harmonized Index of Consumer Prices (HICP) was confirmed at 7% YoY in April. Germany, the country reported an unexpected increase in the Producer Price Index (PPI), up 4.1% YoY in April.

US data released these days was mixed. Retail Sales rose 0.4% MoM in April, missing expectations, although the Control Group sub-component increased by 0.7%, beating expectations. The NY Empire State Manufacturing Index plummeted to -31.8 in May, although Industrial Production improved by 0.5% MoM in May.

Comments from Federal Reserve Chairman Jerome Powell on Friday put mild pressure on the US Dollar.  Powell said that inflation is far above the objective and that high inflation poses significant hardships. He also noted that the policy rate may not have to rise as far as otherwise due to tightened bank credit conditions.

Next Tuesday, S&P Global will release the preliminary estimates of the May PMIs. Generally speaking, business activity is expected to have decelerated in Europe and the United States, although the anticipated slide seems modest. On Wednesday, the focus will shift to the Federal Open Market Committee (FOMC) Meeting Minutes, which may shed some light on future Fed actions. On Thursday, the US will release the final estimate of the Q1 GDP, expected to confirm an annualized pace of growth of 1.1%. Finally, on Friday, the US will release the April Personal Consumption Expenditures (PCE) Price Index, Fed’s favorite inflation gauge.

EUR/USD technical outlook

The EUR/USD weekly chart shows that further slides are yet to be confirmed but also that the risk of a new leg lower has increased. The pair has extended its decline below a bearish 100 Simple Moving Average (SMA), which now provides dynamic resistance at around 1.0890. Furthermore, EUR/USD is currently struggling to hold above a flat 20 SMA. At the same time, the pair has come dangerously close to a critical support level at 1.0745, the 61.8% retracement of its 2022 yearly decline.

Finally, the Momentum indicator in the weekly chart is stuck to its 100 level, unable to provide directional clues, while the Relative Strength Index (RSI) indicator continues heading south, currently standing at 53.

The daily chart shows that EUR/USD is battling to recover above a flat 100 SMA, while the 20 SMA gains downward traction far above the current level. At the same time, technical indicators managed to turn higher but remain near oversold readings and lacking momentum enough to confirm an interim bottom.

Below the aforementioned Fibonacci support, the bearish case will be much firmer. The pair could then extend its slide towards 1.0660, while below the latter, the fall should continue towards the 1.0500/40 price zone. On the other hand, 1.0900 comes in the bulls’ way with gains beyond aiming for a test of the 1.1000 threshold.

EUR/USD Sentiment poll

The FXStreet Forecast Poll shows that bears dominate the near-term, but buyers are far from done. The EUR/USD pair is seen down next week, averaging 1.0741 with 60% of the polled experts betting for a decline. Nevertheless, bulls return afterwards, with buyers accounting 52% in the monthly view and 80% in the quarterly one. On average, the pair is seen recovering above 1.1000 in the wider perspective.

The Overview chart favors a recovery. The weekly moving average has partially lost its bearish tone, although it still heads south. The monthly one, on the other hand, is neutral, as most targets accumulate between 1.0600 and 1.1000, while the quarterly indicator ticked marginally higher, overall neutral. Still, and in the latest time frame, most polled experts are seeing the pair above 1.1000, and as high as 1.1600.

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Author

Valeria Bednarik

Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.

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