EUR/USD Weekly Forecast: US Dollar meant to keep rallying despite expected ECB hike

The EUR/USD pair edged lower and settled around 1.1550, trading at levels last seen in early April. Market participants finally gave up on optimism, with a combination of war-related fears and upbeat United States (US) data boosting the US Dollar (USD) demand by the end of the week.

Hopes for a Memorandum of Understanding (MOU) between the US and Iran put mild pressure on the Greenback by the end of May, but the lack of progress in the first days of June finally pushed the USD sharply up. On Friday, an upbeat Nonfarm Payrolls (NFP) report boosted the odds for a Federal Reserve (Fed) interest rate hike in December to above 60%, according to the CME FedWatch tool.

Iran war: Nothing to see here

The war between the US and Iran is over three months old, and despite the announced MOU, no progress has been made in the last week. The latest tensions revolve around an agreement between Israel and Lebanon, Tehran's initial condition for an end to the war with the US. An agreement was announced mid-week, but conditioned on Hezbollah's acceptance, which it obviously rejected.

Even Iran’s foreign minister, Abbas Araghchi, noted on Thursday that “no tangible progress” has been made in negotiations to end the war. Furthermore, tit-for-tat attacks continue in the Middle East, while passage through the Strait of Hormuz is restricted.

By the end of the week, the USD found additional legs on headlines indicating that Iran informed Pakistan of its acceptance to transfer part of its uranium to a third country it agrees upon, but the US still refuses Iran's request to unfreeze the frozen funds.

Without a clear resolution in sight, the conflict remains as the top market mover, shaping investors’ mood.

European Central Bank rate hike

The European Central Bank (ECB) will announce its monetary policy decision on June 11, and market players have largely priced in a rate hike. European data released in the last few days support policymakers' concerns about mounting inflationary pressures. The European Union (EU) Harmonized Index of Consumer Prices (HICP) was estimated at 3.2% YoY in May after printing at 3% in April, way above the ECB’s goal of 2%. Even worse, the April Producer Price Index (PPI) jumped to 4.9% YoY in April from a previous 2%.

But it is not just about inflation: growth has definitely decelerated, as reflected by the latest Gross Domestic Product (GDP) figures, which showed that annualized growth in the first quarter of the year posted a modest 0.3% advance, while on a quarterly basis it shrank by 0.2%.

Also, S&P Global, alongside local banks, released the final estimates of the May Purchasing Managers’ Indexes (PMIs), which confirmed business activity in the Eurozone remained in contraction territory in the month, as the Hamburg Commercial Bank (HCOB) Composite PMI printed at 48.5, slightly better than the previous 47.5. Finally, German Retail Sales were down 0.3% MoM in April, while the Euro bloc figure in the same period resulted in -0.4%, hinting at shrinking consumption.

The ECB is between a rock and a hard place, but not alone. Most major economies and, hence, central banks, face the same dilemma. Stagflation sounds loud across the globe, with slower growth and mounting inflationary pressures painting the worst-case scenario.

United States resilience losing relevance

There is no doubt that the US economy is bearing with the global situation with more than dignity. Just this past week, Wall Street reached fresh records, despite indexes trimming gains before the weekly close. But is that enough? It does not seem so.

Growth has also ticked lower, but the US remains within expansion territory. The ISM Services PMI was confirmed at 54.5 in May, better than the 53.6 posted in April. The S&P Global Composite PMI printed at 51.5 in the same period, slightly below the previous 51.7.

On Friday, the US Bureau of Labor Statistics (BLS) reported that the country added 172K new jobs in May, according to the Nonfarm Payrolls (NFP) report. Additionally, the Unemployment Rate remained unchanged at 4.3%, as expected, while the Labor Force Participation Rate held steady at 61.8%. Finally, annual wage inflation, as measured by the change in the Average Hourly Earnings, softened to 3.4% from 3.6% in April, in line with expectations.

Right after the release of the NFP report boosting rate hike odds, White House Adviser Kevin Hassett publicly stated that the Fed “should not hike” and will have room to cut. On the other extreme, Fed's Beth Hammack delivered some hawkish remarks, indicating that action on interest rates could be necessary soon, adding that it's reasonable to keep rates steady for now, but if recent trends continue, it may soon be appropriate to act against high inflation.

What’s next in the docket?

Beyond the ECB monetary policy announcement, the macroeconomic calendar will feature these days, the May US Consumer Price Index (CPI), forecast at 4.2% YoY, effectively doubling the Fed’s 2% goal. The country will also publish the PPI for the same month, while Germany will release the final estimate of the May HICP.

EUR/USD Technical Outlook:

Sellers took over EUR/USD. The daily chart for the pair shows spot holds beneath all its moving averages, with the 20-day Simple Moving Average (SMA) at 1.1643, which gains downward traction below the longer ones. The 200-day and 100-day SMAs at 1.1680 and 1.1696, respectively, lack directional strength, but keep the broader tone capped. The same chart shows that the Relative Strength Index (RSI) indicator accelerated south and now stands at around 36, with no signs of downward exhaustion, while the Momentum indicator retreats from its midline into negative territory, supporting lower lows ahead.

In the weekly chart, EUR/USD holds above the long-term 100- and 200-week SMAs but falls further below the 20-week SMA at 1.1688, which helps reinforce the resistance around 1.1690. Meanwhile, technical indicators are gaining downward momentum below their midline, with the RSI indicator currently at 45, in line with fresh selling interest. A long-term static support at 1.1470 draws a line in the sand, as a clear break below the level should hint at steady and sustained decline ahead, with an initial target at 1.1200.

(The technical analysis of this story was written with the help of an AI tool.)