EUR/USD, Oil Outlook: Two Trades to Watch

Oil rises to a 2-month high ahead of CPI, inventory data & on China stimulus optimism

• USD falls ahead of CPI data
• EIA oil inventory data to show 2.2 million draw
• Oil breaks out towards 75.00

Oil prices rose 2.2% on Tuesday, extending gains from last week and have risen to the highest level since early May. A weaker dollar ahead of US inflation data, optimism surrounding Chinese stimulus and US stockpile data are lifting the price.

The USD has fallen to a 2-month low on bets that the Fed is close to reaching peak rates this cycle. A weaker U.S. dollar makes dollar-denominated oil more attractive for buyers with foreign currencies. Today’s inflation data is expected to cool to 3%, and while a July rate hike is a given, the data will shed more light on whether to expect another hike this year.

Meanwhile, the prospect of the Fed nearing the end of its hiking cycle is also boosting the oil demand outlook. Higher rates slow economic growth, so any sign that rates could be at a peak could be considered bullish for oil.

Meanwhile, oil bulls are also waiting for more stimulus measures from China. Recent data from the world’s largest oil importer has shown a slowing momentum of the post-pandemic recovery. The Chinese Securities Journal reported that Beijing is likely to increase stimulus spending to support the economy, which would lift the oil demand outlook.

On the supply side, oil prices are also being supported by the oil production cuts announced by Saudi Arabia and Russia last week.

Data from the API showed that US crude oil stockpiles unexpectedly grew by over 2 million barrels in the week to July the 7^th. Meanwhile, EIA data later today is expected to show a draw of 2.2 million barrels.

Oil outlook – technical analysis

After rebounding off support at 67.00, the price has rallied, pushing above the falling trendline resistance dating back to early April, and is looking to test the June high of 75.00. The RSI above 50 supports further upside.

A rise above 75.00 exposes the 200 sma at 76.30 and opens the door to 77.40, the falling trendline resistance dating back to July last year.

On the downside, should sellers successfully defend 75.00 resistance, sellers could look towards 72.00 the confluence of the falling trendline support and December low.

EUR/USD rises ahead of US inflation data

• US CPI is expected to fall to 3.1% YoY
• ECB to keep raising rates
• EUR/USD holds above 1.10

EUR/USD is holding comfortably above 110 amid a weaker U.S. dollar as investors look ahead to US inflation data and appear increasingly confident that the Federal Reserve will only hike once more this cycle.

The US index continues its four-day downward trend as investors await inflation data. US CPI is expected to cool to 3.1% YoY in June, down from 4% in May. However, this is mainly due to base effects. CPI is expected to rise 0.3% MoM, which would still be too hot for the Federal Reserve.

Core inflation is expected to cool for a third straight month to 5% from 5.3%. This would still be over twice the Fed’s 2% target.

While the data isn’t likely to impact the Fed’s decision in 2-weeks’ time to hike interest rates (which is 93% priced in), it could shed light on the likelihood of another rate hike before the end of the year.

The market is convinced that there is limited headroom to hike rate much further.

The data comes after German inflation rose to 6.4% YoY in June, leaving the ECB with little option other than to hike interest rates further. ECB President Christine Lagarde speaking at the annual ECB conference made it clear that more hikes are needed to tame inflation.

However, opinion is likely to become increasingly divided within the ECB as inflation cools further. Spanish inflation cooled to 1.9% YoY in June. ECB Governing Council member Francois Villeroy de Galhau said earlier this week that inflation is expected to continue to decline and could be at 2% by 2025.

EUR/USD outlook – technical analysis

After testing the 100 sma at 1.0830 again at the end of the last week, the price pushed higher, breaking above the 2-week falling trendline and the 2-month falling trendline resistance. The price pushed above 1.10, which, together with the RSI above 50, keeps buyers hopeful of further gains.

Bulls could look towards resistance at 1.11.

On the downside. Support can be seen at 1.0980, the falling trendline support ahead of 1.0924 the 20 sma. A break below here opens the door to 1.0840 the 100 sma.