EUR/USD Analysis: Mideast Turmoil Drives The Week Ahead – 06/17/2023

Week Ahead Key Points

• The ongoing conflict in the Middle East will be a key driver for markets in the coming week.
• Other important themes include US interest rates and earnings season, as well as a series of top-tier UK data points.
• EUR/USD remains in a bearish channel amidst general strength in the greenback – potential for more downside in the coming week?

The Week Ahead – Calendar

Source: StoneX

Key Theme for The Week Ahead - Have US Interest Rates Peaked?

What a week!

It was just this time last week that we were highlighting the big surge in US interest rates, with the benchmark 10-year Treasury bond surging to a 16-year high near 4.90%. Now though, following the outbreak of violence in Israel and a week of somewhat dovish Fedspeak, yields have come off the boil to trade to closer to 4.6% as traders speculate that the Fed may be done raising interest rates; indeed, the market-implied odds of another Fed rate hike have fallen to roughly 33% from closer to 50% at this time last week.

If Jerome Powell and Company want to refine or refute the traders’ collective wisdom in pricing out an interest rate hike this year, they’ll have plenty of opportunities to do so. As the table below shows, there are roughly 20 Fed speeches to watch next week, with key members like FRBNY President John Williams, Fed Vice Chair Philip Jefferson, and of course, Fed Chairman Jerome Powell all taking the stage throughout the week:

Source: Bloomberg

A consistent chorus highlighting the recent rise in interest rates as “doing the Fed’s job for it” could give traders confidence that the Fed’s tightening cycle is done, whereas a more balanced and “data-dependent” message that leaves another rate hike on the table could further boost the US dollar and hurt indices.

Key Theme for The Week Ahead – Oil Prices Surge on Middle East Turmoil

While our thoughts are with those affected by the horrific situation in Israel, it's also crucial to understand the significant market dynamics that are evolving due to the conflict. For one, any time there is geopolitical conflict, it can hurt traders’ risk appetite, and that may be a factor that has contributed to last week’s pullback in indices and yields, as well as the rally in gold, a traditional “safe haven” asset.

More immediately, traders are also concerned with the potential for a widening conflict to disrupt oil production in the Middle Easy. As a result, we saw the price of both Brent and WTI Crude oil surge by 4-5% over the last week. Moving forward, a prolonged or widening conflict could further boost oil prices, especially against a backdrop of structural undersupply in the oil market for the remainder of the year.

Key Theme for The Week Ahead – US Earnings Season Kicks Off in Earnest

Friday brought the generally strong release of some major US banks’ Q3 earnings reports, and those continue into next week as well. At the same time, we’ll also get the results from US airlines, media streaming giant Netflix (NFLX), and EV manufacturer Tesla (TSLA). With earnings season poised to only accelerate from there, it’ll be worth watching to see if (and which) US corporations are thriving in the current environment…and which are struggling under the weight of rising interest rates.

Key Theme for The Week Ahead – UK Data in Focus

The final theme to watch next week will be the release of the UK’s most important monthly economic reports. As the calendar above shows, Tuesday brings the UK jobs report, where earnings will be a key focus, followed by CPI on Wednesday and retail sales on Friday. With markets currently pricing in 50/50 odds of another BOE rate hike this year, the coming week’s slate of data will be a key driver for UK assets over the rest of the month.

EUR/USD Technical Analysis – EUR/USD Daily Chart

Source: TradingView, StoneX

The world’s most widely-traded currency pair had a rollercoaster ride of a week. EUR/USD generally rallied through the first half of the week before reversing sharply to the downside on Thursday after a slightly hotter-than-expected US CPI report and a poor Treasury auction drove interest rates higher.

Looking at the chart, EUR/USD remains in its 3-month bearish channel, meaning the path of least resistance heading into the coming week remains to the downside from a technical perspective. The next area for bears to watch will be previous support in the 1.0480 zone, followed by the 50% Fibonacci retracement of the 2022-2023 rally at 1.0400.

For bulls to consider meaningful long positions, EUR/USD would have to break above last week’s high at 1.0640, a move that could expose the 200-day EMA closer to 1.0750 next.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX