EUR/USD outlook: Stronger EZ data underpins euro as dollar weakens

• Eurozone data improves further to boost EUR/USD outlook
• US macro highlights include PMIs, jobless claims and new home sales
• Hawkish FOMC minutes should be taken with a pinch of salt
• EUR/USD technical analysis points higher

The EUR/USD rebounded, while the US dollar weakened against most major currencies in the first half of Thursday’s session. The dollar weakness follows a stronger performance for much of this week, with gains driven by hawkish Fedspeak and the FOMC minutes released yesterday. It looks like investors are having second thoughts about the level of Fed’s hawkishness given the deterioration we have seen in recent data releases. Meanwhile, improving economic data in the Eurozone is helping to provide support for the single currency. As well as better-than-expected PMI data we observed this morning, especially from the German services sector, we also had an unexpected rise in Eurozone wage growth in the first quarter. Wage grow was primarily driven by a significant increase in Germany, which could help accelerate the recovery. As a result of today’s data releases, our EUR/USD outlook remains positive.

Eurozone data improves further to boost EUR/USD outlook

The ECB reported that the Eurozone Negotiated Wages in Q1 rose to 4.7% year-over-year. Analysts had expected it to drop to 4.0% from 4.5% in Q4. The rise was therefore totally unexpected, with most analysts anticipating moderation in wage growth. It looks like a catch-up effect in Germany led to another increase in Eurozone wages at the beginning of the year, providing a major dilemma for the ECB ahead of its June rate decision where many had expected the central bank to cut rates. The improvement in purchasing power should help to accelerate the economic recovery, reducing the need for easy monetary policy to drive growth.

We had already seen better-than-expected manufacturing PMIs from the Eurozone and UK this morning. While Eurozone services PMIs were a little softer, German services PMIs beat expectations, rising to their highest point since last June. The PMI data has further alleviated growth concerns over Europe, providing mild support to European shares and the single currency…

Hawkish FOMC minutes should be taken with a pinch of salt

The hawkish minutes from the FOMC’s May 1 meeting that were released yesterday surprised on the hawkish side. While the consensus was that the policy was "well positioned," numerous members were open to additional rate hikes if necessary. Notably, several participants expressed doubts about whether the policy was sufficiently restrictive. However, this perspective must be considered in light of the strong inflation and job market data from March. Despite more encouraging data in April, some hawkish members, such as Neel Kashkari and Chris Waller, continued to express concerns about inflation. However, it is reasonable to assume that the overall sentiment of the FOMC has become somewhat less hawkish since the May meeting, given the deterioration we have seen in recent data releases. That’s probably how FX traders interpreted it, given the renewed dollar weakness we are observing today. Whether or not the dollar will find support again will depend on the upcoming data releases from the US….

US macro highlights include PMIs, jobless claims and new home sales

The S&P Global US manufacturing PMI is expected to print an unchanged 50.0 reading for May, while the services PMI is also expected to show little deviation from the previous print of 51.3. But first up, we will have the jobless claims data at 08:30 ET. Today’s other data highlights include new home sales and Kansas City Fed Manufacturing Activity survey.

In the US, stagflation concerns are rising. With price pressures remaining higher and incoming data surprisingly negatively of late, this does not bode well for the economy moving forward. We have seen several weaker US macro pointers since April's non-farm jobs report was released earlier this month. Subsequent data releases have mostly fallen short of expectations, signalling a slowing US economic recovery. That trend continued on Wednesday with existing home sales coming in much weaker and crude oil inventories showing a surprise build. This month's other disappointing economic reports include the forward-looking ISM manufacturing and services PMIs, as well as data on retail sales, building permits, and housing starts.

Thus, if the trend of weaker macro data continues, then this could lessen the need for prolonged tight monetary policy. In turn, that could keep the dollar undermined.

EUR/USD outlook: technical analysis points higher

Source: TradingView.com

The EUR/USD has been residing inside what appears to be a bullish flag continuation pattern in the last few days. A potential break above the resistance of this pattern around 1.0850 to 1.0860 area would signal the resumption of the bullish trend we have seen since rates made a low at just above the 1.06 handle in mid-April. If seen, the EUR/USD could rise to take out liquidity that would now be resting above this month’s high of just under 1.09 handle at 1.0895. In other words, 1.0900 is the next upside objective.

As mentioned, the underlying trend has turned bullish for the EUR/USD following the break of the bearish trend line earlier this month that had been in place since December. Since then, we have seen the EUR/USD climb above both the 21- and 200-day moving averages to tip the balance in bulls’ favour. More recently, the 21-day has crossed above the 200-day average, which should appease some trend followers.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R