EUR/USD Weekly Forecast: Interim bottom or dead cat bounce?

• Risk-aversion persists as growth and inflation data become more worrisome.
• The US Federal Reserve and the European Central Bank keep moving into quantitative tightening.
• EUR/USD is correcting extreme oversold conditions and could keep rallying in the near term.

The EUR/USD closed the week with solid gains just below the 1.0600 level. The main reason behind the advance was the dollar’s broad weakness, despite the persistent risk-averse sentiment.

Why did the dollar give up?

Considering that the well-known reasons behind ongoing fears remain intact, it is hard to explain the greenback’s decline. Inflation stands at worrisome levels, and the latest released figures double or even triple central banks’ comfort levels. Economic growth deray continues amid pandemic-related restrictions increasing in Asia. Global employment and wage growth are far from optimal, regardless of confident policymakers.

Overall, major economies are struggling to recover some form of pre-pandemic balance, but the road is bumpy, and there’s a long way to go.

The American dollar has been the preferred safe haven in the previous months and reached multi-year highs against most major rivals. The EUR/USD pair fell to 1.0348, its lowest since January 2017. Extreme overbought conditions partially explain the latest dollar’s decline.

Another factor that may have helped the bullish case for the pair is the European Central Bank. Members of the Government Council had frantically announced their willingness to hike rates as soon as possible, with July now on the table. Financial markets are now pricing in a 52% chance of a 50 bps hike at the beginning of the third quarter, up from 40% in the previous week.

The US Federal Reserve has a much more aggressive stance, but it was anticipated long ago. In the last few days, the path towards tightening remained the same. No surprises mean no market reaction.

Adding to the greenback’s woes, US growth has been downwardly revised by different institutes throughout the week. S&P, Wells Fargo, and even JP Morgan are now expecting the economy to grow at a slower pace than previously estimated. Economic data released these days is clearly pointing in that direction. The May Philadelphia Fed Manufacturing Survey index fell to 2.6, the lowest level since the pandemic began. New orders and shipments were up, but prices paid, employment and inventories fell. The outlook was also down, hinting at a gloomy foreseeable future.

Where next?

But is this the end of the dollar’s rally? Hardly. The decline is a mere correction in the big picture. Meanwhile, Wall Street had yet another turbulent week, as the Dow Jones Industrial Average and the S&P 500 posted losses for a sixth consecutive week. The indexes could also correct higher in the near future, but they are on a brink of entering a bear market.

Demand for government bonds has brought yields lower, although not that much, as investors keep speculating higher inflation will result in better benefits coming from safe-haven bonds.

Beyond inflationary pressures and coronavirus-related disarray, the European Union, is also battling with Russia. Sweden and Finland's desire to join NATO has escalated tensions with Moscow, which uses its energy resources as a trump card. EU representatives have been unable to agree on a full oil import embargo, as some countries still depend on the troublesome country. The EUR is not an attractive investment.

That said, the corrective advance could continue, but a long-lasting bullish EUR/USD is not on the table.

More hints on economic health will come next week by the hand of the May preliminary S&P indexes for the EU and the US. The latter will also release April Durable Goods Orders and the second estimate of the Q1 Gross Domestic Product.  

EUR/USD technical outlook

The EUR/USD pair is trading a handful of pips above 1.0545, the 23.6% retracement of the March/May decline. The next Fibonacci resistance level is 1.0667, a potential bullish target for the upcoming days.

The weekly chart shows that technical indicators have begun correcting extreme oversold conditions but that they remain well into negative levels. The 20 SMA heads firmly lower at around 1.1000, while the longer moving averages are developing over 400 pips above the latter, reflecting the length of the latest slump.

Technical readings in the daily chart hint at a limited bullish potential. The pair is now developing above a firmly bearish 20 SMA, which converges with the aforementioned Fibonacci support. The Momentum indicator has crossed its midline into positive territory but is losing its upward strength, while the RSI indicator turned flat around 47. Generally speaking, there are no signs yet of further gains ahead.

Sellers could meet support around 1.0470 if the pair breaks below the 1.0540 area, while additional slides would expose the 1.0339 level, January 2017 monthly low.

On the other hand, an extension beyond 1.0670 should support a rally towards the 1.0760 price zone en route to 1.0820. 

EUR/USD sentiment poll

The FXStreet Forecast Poll suggests that the pair will tend to advance within familiar levels. The weekly perspective is neutral, with EUR/USD seen averaging 1.0564. The sideways behavior is expected to extend in the following weeks, while bulls are a majority in the wider view. Still, only 49% of the polled experts see it at higher levels, and on average at 1.0617.

The Overview chart hints at a near-term bounce, with the moving average heading higher, although the pair is hardly seen above 1.0600. The monthly moving average remains flat, with most targets accumulating around the current level, although with some bets aiming for a corrective advance towards 1.1000. Finally, the quarterly media is neutral-to-bearish, suggesting limited long-term buying interest. Bets on fresh yearly lows have increased, while advances beyond 1.1000 are hardly in sight.