EUR/USD, FTSE 100 Forecast: Two trades to watch

EUR/USD falls as Eurozone inflation cools by more than expected

EUR/USD remains under pressure as a stronger U.S. dollar combines with fading expectations for further ECB rate hikes.

Data today showed Eurozone inflation cooled by more than expected. Headline CPI eased to 2.8% year-on-year in June from 3.2% in May, below forecasts of 3%, while core inflation unexpectedly slowed to 2.4% from 2.6%.

The easing in inflation largely reflects the sharp fall in energy prices after oil returned to pre-conflict levels following the extension of the U.S.-Iran ceasefire and the reopening of the Strait of Hormuz. Services inflation, a closely watched measure by the ECB, also cooled to 3.2% from 3.5%, suggesting underlying price pressures are beginning to ease.

Although inflation remains above the ECB's 2% target for a fourth consecutive month, today's data has reduced expectations for a more aggressive tightening cycle. Markets still expect one further 25-basis-point rate hike by year-end, but confidence in additional moves beyond that has faded.

Attention now turns to ECB President Christine Lagarde's speech at the ECB Forum in Sintra, where investors will look for clues on whether policymakers share the market's view that inflation pressures are easing.

Meanwhile, the U.S. dollar remains close to a 13-month high after last month's hawkish FOMC meeting. Markets are pricing around a 65% probability of a 25-basis-point Fed rate hike in September and continue to see scope for further tightening before year-end.

Federal Reserve Chair Kevin Walsh is also due to speak today, while tomorrow's U.S. non-farm payroll report could prove the next major catalyst for Fed expectations.

The widening policy divergence between the Federal Reserve and the ECB continues to favour the U.S. dollar and remains the dominant driver of EUR/USD.

EUR/USD Forecast – Technical Analysis

EUR/USD has broken below its symmetrical triangle pattern and both the 50 and 200-day SMAs, falling to a yearly low of 1.1325.

The pair has bounced from that level but has run into resistance around 1.1420. Combined with the RSI below 50, the technical picture continues to favour the downside.

Sellers will look for a break below 1.1325 to create a lower low and expose 1.1300, ahead of 1.1200.

Any recovery would first need to break above 1.1420 to shift the near-term bias and bring 1.1500 into focus. Above there, the 50-day SMA around 1.1600 becomes the next resistance level.

FTSE 100 eases as weak miners offset gains in defence

The FTSE 100 is trading modestly lower on Wednesday as weakness in precious metal miners offsets strength in defence stocks.

The UK index rose for a sixth straight quarter in Q2, with 3% gains following a 2.5% rise in Q1. This puts the index on track for its strongest performance streak since 2022.

Gold has fallen to fresh lows after dropping around 14% in June, its worst monthly performance since 2013. The decline reflects a stronger U.S. dollar and growing expectations that the Federal Reserve will keep interest rates higher for longer following last month's hawkish policy meeting.

Higher interest rates increase the opportunity cost of holding non-yielding assets such as gold, weighing on precious metal prices and, in turn, mining shares.

While miners are under pressure, defence stocks are helping limit losses. BAE Systems is rising 0.8%, while Babcock is up 2%.

Elsewhere, Associated British Foods is down 2.5% after warning that its sugar business continued to suffer from disruption linked to the Middle East conflict, despite progress with plans to spin off Primark.

On the data front, UK manufacturing PMI was revised lower to 52.5 in June from the preliminary reading of 53.1 and down from 53.9 in May. While the sector remains in expansion territory, growth in new orders slowed sharply, raising questions over how sustainable the recent improvement will prove. Encouragingly, manufacturers' input costs rose at their slowest pace since March, pointing to easing inflation pressures.

Attention now turns to Bank of England Governor Andrew Bailey's speech at the ECB Forum in Sintra. Any indication that the Bank is becoming more cautious on further rate hikes could support interest rate-sensitive sectors such as consumer discretionary, real estate and housebuilders.

FTSE 100 Forecast – Technical Analysis

The FTSE 100 has recovered from the 10,175 low, breaking above both the 50-day SMA and the falling trendline resistance before stalling below the 10,550 May high.

The RSI remains above 50, suggesting buyers retain the near-term momentum.

A move above 10,550 would create a higher high and expose 10,700, the April high, ahead of the record high at 10,950.

Support is seen around 10,450 at the former trendline resistance, followed by the 50-day SMA near 10,380. A break below 10,175 would create a lower low and expose the 200-day SMA around 10,100, with 10,000 the next psychological support.