The EUR/USD was trying to bounce off its earlier lows ahead of the release of the ISM services PMI, but without much success. It remained under pressure from a rebounding US dollar, which has found support this week from multiple sources. The focus for the USD traders is turning to key US data as we approach the business end of the week: ISM services PMI today and US non-farm payrolls report tomorrow. Unless we see surprisingly weak numbers from these reports, the EUR/USD forecast remains modestly bearish in the short-term outlook.
US dollar finds support from multiple sources
The US dollar has strengthened for a fourth consecutive day, sending the EUR/USD down for the fifth session. The greenback has been bolstered by several reasons. At the start of the week, it was Fed Chair Powell’s hawkish remarks that provided the greenback a lift. Then we had a couple of stronger-than-expected labour market indicators, which reduced the likelihood of another 50 basis point rate cut this year. We have also seen weakness come into a couple of major foreign currencies. On Wednesday, the yen slumped after Japanese Prime Minister Shigeru Ishiba said he does not “believe that we are in an environment that would require us to raise interest rates further,” following a meeting with Bank of Japan Governor Kazuo Ueda. Today, it was the Bank of England Governor that sent the pound slumping after saying that the UK central bank could be a “bit more aggressive” in cutting interest rates, provided the news on inflation continued to be good. Adding to the dollar’s momentum has been the ongoing Middle East conflict, which has driven up geopolitical risks and undermining the EUR/USD forecast and risk-sensitive currencies across the board.
This newly found momentum means the greenback is likely to remain supported on the dips until the release of the US jobs report on Friday, which could set the tone for its near-term direction before attention shifts to the US presidential election. The immediate focus will be on the ISM services PMI and its employment component, with the data set for release at 15:00 BST.
Middle East tensions and EUR/USD forecast
Tensions in the Middle East have played a significant role in the dollar's recent performance. The latest missile exchange between Israel and Iran has left traders watching closely for Israel’s next move. Any major retaliation could shake markets further. Israel has vowed to respond while intensifying its ground operations in Lebanon. However, there’s also the possibility of de-escalation. Should Israel opt for a more restrained response, avoiding key sites like Iran's nuclear facilities, markets may calm down, stabilising the euro and other risk-sensitive currencies. But if the conflict escalates, the EUR/USD forecast could see even greater headwinds as risk-aversion grows.
Oil prices have surged in response to these uncertainties, hovering around $75 per barrel as traders await Israel’s response. The dollar, often seen as a safe-haven currency, has strengthened alongside rising oil prices. However, if Israel’s retaliation is limited, the market could interpret this as a sign of de-escalation, possibly easing pressure on both oil prices and the dollar. Still, with tensions this high, volatility remains a significant factor.
Attention turns to US non-farm jobs report
While geopolitics have taken centre stage, domestic US data has also been crucial to shaping the dollar's direction. Powell’s recent comments pushed back against the idea of another 50bps rate cut this year, and stronger jobs data (JOLTS jobs openings and ADP payrolls) further supported his stance. Friday’s official payroll report will be critical, especially as markets weigh geopolitical risks against the domestic economy’s performance. Even with expectations of more rate cuts by year’s end, Powell’s remarks suggest that it would take quite a weak report to dampen the dollar. Today’s release of the ISM services PMI will also provide additional insights into the economy’s health, adding complexity to the dollar forecast.
EUR/USD technical analysis
Source: TradingView.com
The short-term EUR/USD technical forecast has turned bearish ever since breaking its trend line and 21-day moving average this week. The EUR/USD is now nearing the lower end of its recent range around 1.1000 area after falling through a few short-term support levels this week, including the area between 1.1100 to 1.1125. This 1.1100-1.1125 zone is now the most important hurdle to watch should we get any upside moves this week, say as a result of weaker US data. Only a closing break above this zone would be a positive technical development. On the downside, if support around the 1.1000-1.1030 area breaks, and we hold below this region, then that could pave the way for a potential drop towards the next important technical area circa 1.0900.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
