• 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. 

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD stays under bearish pressure, closes in on 1.0500

EUR/USD stays under bearish pressure, closes in on 1.0500

EUR/USD has extended its daily slide in the American session and declined below 1.0530. The one-year inflation expectations of the Conference Board's Consumer Confidence Survey climbed to 8% in June from 7.5% in May, providing a boost to the greenback. 

EUR/USD News

GBP/USD continues to push lower toward 1.2200

GBP/USD continues to push lower toward 1.2200

GBP/USD has turned south in the American session and slid toward 1.2200. The US Dollar Index extended its daily rally toward 104.50 after the latest US data on Tuesday, forcing the pair to stay under bearish pressure. 

GBP/USD News

Gold continues to fluctuate in tight range above $1,820

Gold continues to fluctuate in tight range above $1,820

Gold is having a difficult time making a decisive move in either direction on Tuesday and fluctuating in a narrow range above $1,820. As investors assess the latest data releases from the US, the 10-year US T-bond yield clings to modest gains above 3.2%.

Gold News

Former Ripple CTO is dumping millions of XRP, traders beware

Former Ripple CTO is dumping millions of XRP, traders beware

XRP price shows promise that it is ready to trigger a massive run-up as the first half of the year comes to an end. There are three reasons why investors should be bullish on Ripple.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!

BECOME PREMIUM

Majors

Cryptocurrencies

Signatures