Bearish view
- Sell the EUR/USD pair and set a take-profit at 1.0670.
- Add a stop-loss at 1.0770.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.0730 and a take-profit at 1.0800.
- Add a stop-loss at 1.0670.
The EUR/USD exchange rate rose after the French election and then reversed gains as investors assessed enduring political risks in the country. The pair rose to a high of 1.0776 on Monday, and then erased all the initial gains, and was trading at 1.0730.
Enduring risks and ECB rate cuts
The EUR/USD pair retreated as traders reacted to Sunday’s French election in which the right-leaning parties won by a smaller margin than expected.
Still, investors are concerned about the move toward the right and its impact on the economy. The concerns are that the government could move to expand fiscal policy, adding to a swelling budget deficit.
Most importantly, some analysts worry that the trend could see the country launch a referendum to exit the European Union.
The euro also dropped after a dovish statement by Gediminas Simkus, a member of the bank’s governing council. In a statement, he noted that the bank was likely to deliver two more rate cuts this year barring any surprises.
He predicted that the bank would leave interest rates steady this month and then cut in the following meeting. If this is correct, it will mean that the ECB has completely diverged from the Federal Reserve.
Most analysts expect that the Fed will maintain interest rates unchanged and then slash by 0.25% in December if inflation nears its 2% target. As a result, the interest rate differential will create a good carry trade opportunity, where traders borrow from low-interest rate currencies (euro) to invest in higher rate ones.
The next key data to watch will be the flash European inflation data scheduled for Tuesday. Economists expect the data to show that the headline Consumer Price Index (CPI) eased slightly from 2.6% in May to 2.5% while the core CPI moved from 2.9% to 2.8%.
The US will also publish the latest JOLTs job openings data on Tuesday. Economists see the data to show that the economy had 7.86 million vacancies in May, down from 8.05 million in the previous month.
EUR/USD technical analysis
The EUR/USD exchange rate peaked at 1.0776 on Monday as the market reflected on the French election. It then retreated to the important support at 1.0725, which coincided with the 61.8% Fibonacci Retracement point.
The Relative Strength Index (RSI) has pulled back from the overbought level of 70 to slightly above 50. Also, the Stochastic Oscillator has moved from the overbought level of near 100 to below 50.
Therefore, the pair will likely continue retreating as sellers target the next key support level at 1.0670, its lowest point in June. This view will become invalid if the pair rebounds above 1.0775.
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