- The EUR/USD reached its highest level in five weeks last Friday, but there is potential for a consolidated pullback in the next five days.
- As the new trading week begins, the pair reached the resistance level of 1.0920, with eyes now on the psychological resistance at 1.1000, which could be achieved if the European Central Bank (ECB) strikes a hawkish tone this week.
The recent EUR/USD gains came with momentum from the weakness of the US dollar on the back of the US CPI report, which came in lower than expected, which boosted hopes for a Federal Reserve interest rate cut in September. Accordingly, European stocks and bonds headed higher as investors cheered the news. According to the platforms of Forex trading companies, the exchange rate of the euro rose to 1.0911 against the US dollar on Friday, which means that it has declined slightly from the peak it recorded on June 4 at 1.0916. Furthermore, the pair opened the new week lower at 1.0887, and we wonder if this suggests that 1.0916 has been established as a near-term resistance point that the bulls need to overcome.
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EUR/USD Technical analysis and forecast:
Technically, the RSI “bottom panel above” approached overbought conditions at 70 but has since turned lower, also suggesting some near-term consolidation in the coming days. For now, the weakness is likely to be short-lived, and a return to the 200-day moving average (1.0805) is possible in the next week or two as part of any consolidation.
This week, the big test for the euro will come next Thursday at midday when the European Central Bank makes its final policy decision. No change will be made to interest rates, but markets will want to know if the bank will cut rates again in September. If the ECB signals such a move, the euro could come under pressure.
However, the ECB is expected to maintain a data-dependent approach, meaning it will keep its guidance as flexible as possible. Analysts note, "The market will focus on the results of the ECB's July monetary policy meeting. Before that, we heard from several board members who emphasized the ECB's data-dependent monetary policy." Added, "These officials also suggested that the September policy meeting, rather than July, might be more significant for the bank's rate outlook. As a result, we and the markets do not expect any major changes in ECB guidance."
Conversely, the performance of the euro against the US dollar “EUR/USD” reflects the ongoing bout of dollar weakness, in contrast to the outright enthusiasm for the euro. Also, we note that the US dollar has been under pressure in recent days as investors settle into a high probability that the Fed will cut interest rates for the first time in September.
Furthermore, confidence was boosted by weaker US CPI inflation data last week. According to trading platforms, the euro against the dollar EUR/USD broke the 1.09 figure following the US consumer price index inflation which recorded -0.1% on a monthly basis in June, down from 0% in May and below expectations of a rise of 0.1%. Overall, money market pricing shows that the chances of a September interest rate cut by the US Federal Reserve are now almost certain after the headline inflation rate fell to 3.0% on an annual basis from 3.3%, which is below expectations of 3.1%.
Additionally, US retail sales data on Tuesday will be the highlight of the week, shedding light on demand in the economy. Market expectations of a less than 0% month-on-month decline could further weaken the US dollar, as the Fed becomes increasingly confident that the process of reducing inflation is back on track. Consequently, increasing market confidence that the Fed may become more comfortable moving towards a rate cut could soon put 1.10 USD on the euro's agenda.
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