EUR/USD outlook: Where to next?

The EUR/USD outlook remained positive as it probed the 1.12 handle, with the dollar continuing to fall for the sixth consecutive day against a basket of foreign currencies. The Dollar Index, meanwhile, was testing 100.00. Investors grew further convinced that July will mark the end of the rate-hiking cycle by the Fed, after the latest inflation data pointed to weakening price pressures.

More on the inflation data below, but first let’s quickly take a look at the EUR/USD’s chart…

EUR/USD outlook: Technical analysis

 Source: TradingView.com

 

The explosive breakout we have seen over the past couple of days suggests the EUR/USD bulls will likely remain in control of price action for a while yet, especially as the long-term trend is also bullish – look no further than the slope of the 200-day moving average.

Interestingly, there’s a Fibonacci-based price action in the making, namely a hormonic Butterfly – see the annotation on the chart. With price points X, A, B and C already established, the key question is where will point “D” occur. This is usually where price finds resistance and turns lows. Fibonacci extension levels can be our guide. The 127.2% extension of the BC leg comes in at 1.1220. But given the sharper move in this CD leg compared to the AB wave, I would expect the CD leg to be bigger than the AB leg. Thus, a continuation towards the 161.8% Fibonacci extension level at 1.1380 is where I would be looking for the EUR/USD to potentially form at least a temporary top.

Meanwhile, the long-term 61.8% Fibonacci retracement level against the drop from the 2021 high comes in at 1.1275.

In terms of support, Wednesday’s high at 1.1140 is now very important to hold insofar as the short-term EUR/USD outlook is concerned. If that breaks, then the April high at 1.1095 will be the next level to potentially provide support or else we will see a revisit of the more significant support around the 1.10 handle.

 

US PPI falls to slowest in 3 years

Weaker inflation data continued to drive risk-on trade across the financial markets, with equity indices on Wall Street hitting fresh 2023 highs, while several currency pairs broke out as well.  

Following the release of weaker US CPI on Wednesday, which came in well below expectations and triggered a dollar sell-off, today’s PPI data further fuelled the disinflationary trade.

PPI rose just 0.1% year-over-year in June, down from 0.9% in May and below expectations for a 0.4% rise.

The Fed is winning its fight against inflation, by the looks of things, which calls into questions their strong hawkish stance and the likely decision to hike rates again come July 26.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R