US Dollar Forecast: EUR/USD Bear Flag Formation Remains Intact

US Dollar Outlook: EUR/USD

EUR/USD gives back the advance from the start of the week as the US Employment Cost Index (ECI) shows a pickup in wage growth, and the exchange rate may struggle to retain the advance from the monthly low (1.0601) should a bear-flag formation unfold.

US Dollar Forecast: EUR/USD Bear Flag Formation Remains Intact

EUR/USD pares the bullish reaction to the Euro Area 1Q Gross Domestic Product (GDP) report as the ECI prints at 1.2% for the first quarter of 2024 versus forecasts for a 1.0% reading, and developments coming out of the US may continue to sway the exchange rate even though the Federal Reserve is expected to keep US interest rates on hold in May.

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Source: BLS

It remains to be seen if the Federal Open Market Committee (FOMC) will respond to the recent data prints as the update to the Personal Consumption Expenditure (PCE) Price Index reveals sticky inflation, and the central bank may stick to the status quo as the ‘Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably down toward 2 percent.’

US Economic Calendar

FOREX.com Economic Calendar

In turn, the FOMC may show a greater willingness to keep US interest rates higher for longer as Chairman Jerome Powell and Co. recognize a lack of progress in bringing down inflation towards the 2% target, and waning expectations for an imminent rate-cut may generate a bullish reaction in the Greenback should the central bank look to further combat inflation.

However, the Fed may continue to prepare US households and businesses for a less restrictive policy as ‘an unexpected weakening in the labor market could also warrant a policy response,’ and a dovish forward guidance may produce headwinds for the US Dollar as market participants prepare for a looming change in regime.

With that said, EUR/USD may negate the bear-flag formation if it continues to retrace the decline from the monthly high (1.0885), but the exchange rate may stage further attempts to test the November low (1.0517) should it track the negative slope in the 50-Day SMA (1.0802).

EUR/USD Chart – Daily

Chart Prepared by David Song, Strategist; EUR/USD on TradingView

• EUR/USD continues to trade in an ascending channel as it holds within last week’s range, with a break/close above 1.0770 (38.2% Fibonacci retracement) raising the scope for a move towards the monthly high (1.0885).
• Need a close above the 1.0860 (50% Fibonacci retracement) to 1.0880 (23.6% Fibonacci extension) region to open up the 1.0940 (50% Fibonacci retracement) to 1.0960 (61.8% Fibonacci retracement) area, but EUR/USD may struggle to retain the advance from the monthly low (1.0601) should a bear-flag formation unfold.
• A break/close below the 1.0610 (38.2% Fibonacci retracement) to 1.0640 (23.6% Fibonacci retracement) region brings the November low (1.0517) back on the radar, with the next area of interest coming in around the 2023 low (1.0448).

Additional Market Outlooks

US Dollar Forecast: USD/CAD Trades in Ascending Channel with Fed on Tap

US Dollar Forecast: GBP/USD Recovery Continues Ahead of US PCE Report

--- Written by David Song, Strategist

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