- The EUR/USD is expected to trade higher this week, although the bigger picture is still one of weakness at the 1.05 psychological support level.
- According to forex trading platforms, the euro is under pressure against the dollar now that markets see the ECB moving on its own to cut rates in June without cover from similar moves by the Fed.
Overall, the divergence in interest rates is a powerful story, and it would take a string of weak US data releases to convince markets that the Fed will be cutting US rates multiple times in 2024. However, the dollar's recent rally has been swift, and we believe that overbought conditions could lead to a retracement of recent gains, giving the likes of the euro a chance to recover. We look for a retest of 1.07 in this week's trading as a more likely event than a retest of last week's lows at 1.06. However, the euro's strength is likely to be short-lived and the overwhelming evidence points to a weaker exchange rate in the coming weeks, with several institutional analysts targeting 1.05 as a target.
Commenting on the performance of the pair, Fuad Razakzadeh, analyst at City Index, says: "The EUR/USD pair is still within a bearish channel and below all the key moving averages as you can see on the chart." Added, "Therefore, the overall trend for EUR/USD is bearish. Now, the key resistance is between the 1.0695 to 1.0725 area and the potential support is at 1.0600 followed by the channel bottom around the 1.0500 psychological support area."
For his part, Kenneth Brooks, FX market analyst at Société Générale, says a return to the November 2022 lows (1.0450) cannot be ruled out, "but it would require an escalation of current trends." Such trends could involve further pricing in of Fed cuts versus more ECB cuts that are already priced in. Moreover, the euro could bounce back against the dollar this week if US economic growth figures, due out on Thursday, come in below consensus expectations of 2.3% annualized Q1 growth. A hot read would only exacerbate the dollar's strength, but given the size of recent gains, we believe the bigger forex market move will follow a disappointing number.
In contrast, according to the results of economic calendar data, the US GDP reading is likely to have a short-term impact on forex markets. Instead, the most important event of the dollar week is the PCE inflation reading on Friday. Economists like to point out that this is the Fed's preferred inflation gauge, although evidence from 2024 suggests the Fed is heavily focused on the hot increases seen in the headline CPI inflation rate.
EUR/USD Technical analysis and forecast:
However, the US PCE numbers could have a market impact on any deviation from the 0.3% monthly growth that the market expects. Once again, we expect the biggest reaction in the FX market to come after a drop in numbers as this will provide markets with a cover to book profits on the recent US dollar strength.
concurrently, the euro zone release on Tuesday at 09:00 GMT constitutes the most important event for the euro this week. Now, markets are looking for a Services PMI of 51.9 and a Manufacturing PMI (important for the Eurozone due to the centrality of German manufacturing) of 46.5. Expect a weaker euro-to-dollar conversion if Eurozone numbers surprise and UK numbers disappoint, and vice versa. Thus, the focus will be on German business climate results on Wednesday, with the Euro likely to react to any surprises here. Ultimately, the market expects the expectations index to read 88.5 and the current evaluation to read 88.9.
Ready to trade our daily Forex forecast? Here’s a list of some of the top forex brokers in Europe to check out.