EUR/USD has little time to celebrate as it is dragged back down
EUR/USD is experiencing schadenfreude – a German word meaning pleasure derived from someone else’s misfortune. The world’s most-popular currency pair is on the rise as speculation of a US rate cut mounts.
Saint Louis President James Bullard has said that the Federal Reserve should cut interest rates soon as inflation is weak and trade tensions create rising uncertainty – echoing the market sentiment. Despite being a known dove, Bullard’s words exacerbated the USD sell-off.
The greenback was already on the back foot after US ISM Manufacturing PMI missed expectations with 52.1 points – . Moreover, US-Sino tensions expanded to visas for Chinese studying in the US. The world’s largest economies continue tussling over technology and continue accusing each other of the failure of trade talks. Yields on 10-year and 2-year bonds have extended their drops, making the USD less attractive.
Yet things are not so rosy in the old continent as the fallout from the European elections threatens fragile coalitions. Italian PM Giuseppe Conte – which is not affiliated with any party – has warned the two collation partners to stop squabbling and hinted he might step down. Relations between the League and the 5-Star Movement have been tense since the former beat the latter in elections. Moreover, both populist parties have differences over the budget and especially tax cuts.
The political situation in Germany – the continent’s largest economy – is also of concern to markets. Chancellor Angela Merkel’s government has received a lifeline from the SPD’s decision to stay in government. However, the center-left junior coalition partner has decided to hold a review of the partnership in the autumn. The party’s failure at the ballot box triggered the resignation of its leader Andrea Nahles – a key figure in bringing about the grand coalition.
The common currency’s troubles do not end with politics. Preliminary inflation figures for May are due today – an essential input for the all-important decision on Thursday – and expectations are low. Consumer price index hit a high of 1.7%, and core CPI reached 1.3% year on year. However, that was only due to the change in the timing of Easter. A significant slowdown is projected now – potentially prompting a downgrade in the bank’s forecasts – and consequently a potential drop in the value of the common currency.
The next events to watch out for are speeches by Federal Reserve Chair Jerome Powell and New York President who will speak later in the day and may shed more light on the Fed’s thinking. Powell currently maintains his patient stance on interest rate – no more hikes but no cuts either.
Overall, if euro-zone inflation drops as expected and Powell keeps the door closed on rate cuts, EUR/USD may reverse its gains.
EUR/USD Technical Analysis
The Relative Strength Index on the four-hour chart is at 77 – well above 70 – and thus reflecting overbought conditions and signaling a possible downward correction.
On the other hand, EUR/USD surged above 1.1265, which capped the currency pair three times between late April and mid-May. Breaking above a significant resistance level indicates further gains – but EUR/USD has had its share of false breaks.
The next resistance line is close. 1.1280 provided support in mid-April and now turns into resistance. Further up, 1.1305 capped a recovery attempt around the same time, and 1.1325 was the high point in April.
Below 1.1265, the first noteworthy support line is 1.1218, which was a high point in late May. It is followed by 1.1190 which held down in early June and served as support beforehand. 1.1145 capped euro/dollar when it traded at a lower range in late May.