EUR/USD outlook: Dollar bulls not done yet

While the EUR/USD outlook appears to be positive and the popular FX pair being among the strongest in G10 FX space, I think that the downside risks are greater than upside and don’t expect any potential move north of 1.10 to hold in the short-term outlook. Last week’s mixed-bag US data releases still point to a Fed rate hike, while today’s release of Eurozone investor confidence index (from Sentix) disappointed, adding to concerns about weak demand from China which is also euro-negative.

Dollar rebounds

The US dollar weakness observed on Friday in reaction to the jobs report has started to dissipate at the start of the new week. The jobs report wasn’t weak enough to dissuade the Fed from hiking in July, I don’t think. I reckon the greenback has room to the upside anyway, in order to catch up with the recent rally in bond yields. The next big scheduled risk event – US CPI – is not due until Wednesday, which means there’s plenty of time for the dollar to make back some ground until deciding on its next directional move when the inflation data is published.  

Today, investors will be listening to Federal Reserve policymakers Loretta Mester, Mary Daly, and Raphael Bostic for clues over the Fed's next steps.

US data recap

Dollar sold off on Friday which saw the Dollar Index close lower on the week, after the latest US jobs report disappointed expectations on the headline front at 209K vs. 224K eyed, although the downward revisions to the prior readings meant it was a bigger miss than the headline front suggested. Still, the drop in the unemployment rate back to 3.6% coupled with a bigger than expected rise in wages (+0.4% vs. +0.3%) means at least on the employment front there are no major recessionary worries.

Last week we also saw a much stronger ADP private payrolls report (+497K vs. +228K forecast), while the ISM services PMI also topped expectations (53.9 vs. 50.3 last), reinforcing the Fed’s view that the strong labour market could help prevent a hard landing in the economy. The main weakness was once again observed in manufacturing, with the sector’s PMI coming in well below expectations again (41.8 vs. 44.0) to its lowest level since May 2020, at the height of the pandemic.

US CPI is this week’s main focus

Bringing the focus back to this week, US inflation data on Wednesday is expected to show that consumer prices cooled to 3.1% annual pace in June. The actual reading will need to be substantially below 3% for the odds of a 25-bps hike to fall meaningfully from the current level of around 90%, according to the CME FedWatch tool.

 

EUR/USD outlook: Technical analysis

On Friday, the EUR/USD broke its short-term trend line, but lack of follow through today means there is a risk that this could put the bulls in a spot of bother. Still, the bears will be in need of some confirmation before potentially punishing this pair. That could come in the form of price potentially going back below Friday’s low at 1.0867. IF there were to happen, then we will have a clear bearish signal to work with.

For now, the path of least resistance is still technically to the upside, but I remain doubtful as to whether we will get any further upside traction without the help of a fresh macro stimulus.

So, watch out for a potential reversal here to turn the EUR/USD outlook bearish.

Source: TradingView.com

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R