EUR/USD Weekly Forecast: ECB should not threaten the bullish stance

Another auspicious week saw EUR/USD trade with decent gains and extend its positive streak for the third consecutive week, including a visit to the key 1.0900 region for the first time since early June.

It was all about the Fed and US data

The firm weekly performance of the European currency and most of the risk-linked galaxy came in response to the marked deterioration of the Dollar’s outlook. Indeed, when tracked by the US Dollar Index (DXY), the Greenback accelerated its monthly downward bias to the area of five-week lows near the 104.00 yardstick pari passu with reignited expectations that the US Federal Reserve (Fed) might trim its interest rates twice this year (vs. the view of just one rate reduction projected by the Committee at its latest gathering).

The above was markedly reinforced by another confirmation of disinflationary pressures in the US economy after the Consumer Price Index (CPI) rose less than estimated in June. That, plus the ongoing cooling of the US labour market, prompted investors to start pencilling in two (or even three) interest rate cuts in the latter half of the year.

On top of that, at his semi-annual testimonies before Congress, Fed Chair Jerome Powell reiterated that the Committee needs to see further progress on inflation heading towards the Fed’s 2% target before considering an interest rate reduction. Despite Powell's message aligning with previous statements, he gave no indication of the potential timing for a rate cut.

And what about the ECB?

There was a radio silence from the European Central Bank (ECB) throughout the week, with the exception of Dutch central bank Chief Klaas Knot, who suggested that there was no case for the central bank to cut interest rates this month, but the September meeting would be "open" and market expectations for further easing were appropriate for now.

In addition, ECB Governing Council member Fabio Panetta also argued earlier in the week that the bank could continue to gradually reduce interest rates without jeopardizing the current fall in inflation.

EUR gains should remain temporary

The sharp correction in the Greenback has been lending much-needed oxygen to the single currency and the rest of its risky peers, therefore underpinning the robust bounce in EUR/USD seen as of late.

However, the perceived deceleration of key US fundamentals, namely inflation and employment, did not change the fact that the biggest economy in the world is indeed heading towards a soft landing, and its outlook remains far from dented.

Factoring in the above and adding the political component of a probable second presidency by Donald Trump, the ongoing weakness of the Dollar should be perceived as transitory, allowing for a rebound of the currency in the not-so-distant future.

EUR/USD technical outlook

By surpassing the key 200-day SMA, EUR/USD has opened the door to the potential continuation of the uptrend in the short-term horizon. Against that backdrop, there is an immediate barrier at the July high of 1.0900 (July 11), closely followed by the June top of 1.0916 (June 4) and the March peak of 1.0981 (March 8). Once the pair clears the latter, it could confront the psychological 1.1000 milestone, which precedes the December 2023 high of 1.1139 (December 28).

In case sellers regain the initiative, spot should meet decent contention at the 200-day SMA at 1.0803. The loss of this region should expose further weakness and, thus, a probable move to the June low of 1.0666 (June 26), ahead of the May low of 1.0649 (May 1) and the 2024 bottom of 1.0601 (April 16).