EUR/USD, Oil forecast: Two trades to watch

EUR/USD falls with manufacturing data in focus, ahead of the ECB rate decision

• Eurozone manufacturing PMI was revised lower to 47.3
• US ISM manufacturing PMI is due later
• ECB is expected to cut rates on Thursday
• EUR/USD trades caught between 1.09 & the 200 SMA

EUR/USD is falling modestly after the pair remained unchanged across the previous week.  The pair continues to trade around the 1.0850 level after softer-than-expected monthly core PCE data on Friday and hotter-than-expected eurozone inflation figures.

This week, investors are looking keenly ahead to Thursday's ECB rate decision. The central bank is widely expected to cut interest rates by 25 basis points but could adopt a hawkish tone given the region’s tick higher inflation, record low unemployment rates, and higher-than-expected negotiated wages.

Before the ECB meeting, attention today is on manufacturing data from the US and the eurozone. Eurozone manufacturing PMI was 47.3 in May, slightly down from the 47.4 preliminary reading. Both the headline reading, and the output index are at 14-month highs, indicating a slower contraction in the euro area manufacturing sector; meanwhile, business confidence improved, and the downturn in new orders slowed, suggesting we could be at a turning point for the manufacturing sector after prolonged weakness.

Looking ahead, attention now turns to US ISM manufacturing PMI data, which is also expected to show that activity in the manufacturing sector contracted at a slower pace.

The data comes as investors continue to digest Friday's core PCE data, which was slightly weaker than expected. This raised expectations of a September rate cut to 53%, up from 49% prior to the data.

Looking out across the week, this week is a busy week as far as U.S. economic data is concerned.  ISM services PMI, Jolts job openings, ADP payrolls, and US nonfarm payroll data are in focus and are expected to provide further clues about when the Federal Reserve may start to cut rates.

EUR/USD forecast – technical analysis

EUR/USD continues to trade in a holding pattern, capped on the upside by 1.09 and on the downside by the 200 SMA at 1.0790.

The long upper wicks on recent candles suggest that demand at the higher prices remains weak. Sellers will look to take out 1.08, the round number and 100 SMA, then the 200 SMA at 1.0790. Below here, sellers could gain momentum towards 1.0725.

Meanwhile, buyers will look to rise above 1.09 to create a higher high and extend gains towards 1.0980, the April high.

Oil holds steady after OPEC+ extends cuts

• OPEC+ extended production cuts until 2025
• Voluntary production cuts will be phased out from October
• China's manufacturing PMI was 51.7 vs 51.4

Oil prices remained steady after OPEC+ agreed to extend all production cuts into next year, but it also clarified some aspects of its plans to unwind some of these cuts.

OPEC+ has been making a series of deep output cuts since late 2022. The group is currently cutting output by 5.86 million barrels per day, which equates to around 5.7% of global demand.

Output cuts of 3.66 million bpd were due to expire at the end of 2024, and voluntary cuts by eight members of 2.2 million bpd were set to expire at the end of June 2024. However, on Sunday, the OPEC+ group agreed to extend the 3.66 million cuts until the end of 2025 and prolong the 2.2 million voluntary cuts until the end of September 2024. The group will then phase out these cuts over the course of a year.

The oil group OPEC+ said they expect demand to average 43.65 million barrels per day in the second half of 2024, implying a 2.63 million barrel per day drawdown. This drawdown would be less when they start phasing out the voluntary cuts in October.

However, the International Energy Agency estimates demand will be much lower at 41.9 million barrels per day in 2024.

OPEC's move to lay out guidance for scaling back supply cuts comes at a time when demand concerns are still high. There are concerns that the Federal Reserve could keep interest rates elevated for longer, dampening economic growth and the demand outlook.

On a more upbeat note, Caixin manufacturing PMI data from China was stronger than expected, helping the demand outlook. The Chima manufacturing PMI rose to 51.7 in May, up from 51.4 in the previous month, marking the highest level since June 2022. This was also ahead of analysts' forecast.

The faster manufacturing growth from the Caixin manufacturing PMI contrasts with the official gauge, which showed a contraction. Last week's weak official data weighed on oil prices, which were down almost 1%.

Looking ahead, the market will focus on U.S. data for further clues over when the Fed may start cutting interest rates, which could affect the demand outlook for oil. US manufacturing PMI data is due later and is expected to show that the contraction in the sector slowed.

Oil forecast – technical analysis

After failing to rise meaningfully above the 200 SMA, oil corrected lower, breaking below the 100 SMA and testing the 76.50 low before edging higher.

Sellers, supported by the RSI below 50, will look to take out the 76.15-76.50 support zone and 75.70, the falling trendline support, to extend losses towards the 75.00 round number.

Any recovery would need to retake the 100 SMA at 79.00, the 200 SMA at 80.00, and the May high at 80.60 to extend gains towards 81.50, the 50 SMA, and on towards 85.00.