EUR/USD outlook remains positive, likely heading to 1.10

What now for the dollar? That’s the key question after Wednesday’s softer data releases caused the greenback to fall across the board, underscoring the view that the economic growth is losing momentum and that inflation is heading lower. The dollar selling took a pause overnight and the greenback was stable during the first half of the European trade, ahead of the release of jobless claims data which has started to move the markets lately. We also have a few other US macro pointer to look forward to. Despite the slow start to today’s session, the recent price action and improving eurozone sentiment suggests the EUR/USD outlook remains positive, with the exchange rate on course to potentially head towards the 1.10 handle.

Before discussing the macro events in greater detail, let’s have a quick look at the chart of the EUR/USD following Wednesday’s big breakout.

EUR/USD technical analysis

Unsurprisingly, the EUR/USD has fallen back amid profit-taking after Wednesday’s data-driven rally. But with several key resistance levels broken, the path of least resistance remains to the upside.

Source: TradingView.com

The first short-term potential support level to watch is around 1.0850-1.0860 on the EUR/USD, an area which failed to offer resistance during Wednesday’s melt up, despite it being a prior support zone. Now that we have broken above here, we could well see a potential bounce around this area, which was being tested at the time of writing.

Further lower, the key support to watch is now between 1.0800 to 1.0825 area, which marks the point of origin of this week’s breakout.

On the upside, 1.0900 is likely to be the next bullish target ahead of the key 1.10 handle thereafter.

US jobless claims among data highlights

We have plenty of second-their data releases to look forward to today.

The latest jobless claims data is expected to show a drop in applications to 219K vs. 231K the previous week. We will also have the Philly Fed manufacturing index, seen dipping to 7 from 15.5 previously. What’s more, building permits are expected to rise to 1.48 million annual pace compared to 1.46m previously, while industrial production is seen printing +0.1% m/m.

EUR/USD outlook: Will the dollar selling continue?

The dollar bears, and the EUR/USD bulls, will be looking for more evidence of a cooling US economy, especially the labour market. Market expectations have shifted to anticipate two rate cuts this year for the first time in a month, although three cuts could be a possibility should the recent trend of weaker US data continues.

The above-mentioned data as well as some other second-tier data to come in the next two weeks aside, there are no major US macro pointers scheduled until the final day of the month when core PCE is released, a week before the May jobs report comes out. Until then, I would expect to see some further dollar selling but at a more gradual pace.

So, I reckon the EUR/USD is going to find buyers on the dips and edge towards the 1.10 handle.

Recent weakness in US data have inspired traders to sell into the dollar’s recovery attempts.

Wednesday’s CPI print missed expectations with a +0.3% m/m reading, and we also saw a flat headline retail sales figure, when a 0.4% increase was expected. What’s more, the Empire State Manufacturing Index painted another gloomy picture for the manufacturing sector, with yet another below-forecast negative reading (-15.6 vs. -9.9 expected).

Wednesday’s disappointing data comes after the April non-farm jobs report, the latest ISM surveys and several other pointers, all disappointed expectations earlier this month.

So, it looks like the US economic recovery is slowing, and this will help bring inflation down, reducing the need to keep monetary policy tight for an extended period of time. The Fed’s tapering of its balance sheet runoff has been an additional bearish factor for the dollar.

Dollar also weighed down by external factors

Meanwhile, external factors are also helping to weigh on the dollar. The big recovery in Chinese markets and the copper rally all seem to indicate that China has turned a corner. What’s more, we have seen improvement in Eurozone and UK data too, boosting the appeal of the euro and pound.

EUR/USD outlook: ECB likely to cut interest rates June

The European Central Bank is expected to cut rates in June, which is fully priced in. But the recent improvement in data means the central bank is likely to be far less dovish in its guidance about future rate decisions. The EUR/USD outlook is unlikely to be impacted by any further ECB talk of a June cut, as this is now baked in.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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