EUR/USD, DAX Forecast: Soft US Data Drives EUR/USD Higher and DAX to Record

EUR/USD, DAX Key Points

• The 1-2 combination of soft CPI and retail sales has made the US dollar the weakest major currency on the day and set off a rally in global stocks
• EUR/USD’s breakout above 1.0800 marks a significant technical move and should keep the market in “buy the dips” mode as long as rates remain above it.
• Germany’s DAX is likewise at record highs, with bulls watching 18,960 and 19,380 as the next levels of interest.

This week’s most highly-anticipated economic data is now behind us, and traders now believe that the US economy may be growing more slowly than they thought when they woke up this morning.

The US CPI report for April came in mostly as expected, with one exception: The month-over-month reading in the headline CPI came in a tick below expectations at 0.3% m/m vs. 0.4% eyed. Though the year-over-year print met expectations, as did both the m/m and y/y calculations of the “core” (ex-food and -energy) readings.

Taking a step back, the decline in the year-over-year Core CPI reading to 3.62% is a significant drop from last month’s 3.8% reading and represents the lowest core inflation reading in 3 years. Combined with this morning’s miss in April Retail Sales (0.0% m/m vs. 0.4% expected), the odds of another spike in inflation are fading, and the Fed is seen as more likely to cut interest rates in Q3, November at the latest. The 1-2 combination of soft CPI and retail sales has made the US dollar the weakest major currency on the day and set off a rally in global stocks.

US Dollar Technical Analysis – EUR/USD Daily Chart

Source: TradingView, StoneX

For the world’s most widely-traded currency pair, another round of dollar weakness is just what EUR/USD bulls ordered. The pair rallied above key resistance near 1.0800, marked by the confluence of the 200-day MA and the year-to-date bearish trend line, yesterday, opening the door for continued strength today after the softer-than-expected US data.

Moving forward, EUR/USD bulls will next navigate the early April highs in the 1.08975 area. With only second-tier data on tap for the rest of the week, traders could look to take profits off this resistance level in the latter half of the week, leading to a slight pullback in the pair. From a bigger picture perspective though, this week’s breakout above 1.0800 marks a significant technical move and should keep the market in “buy the dips” mode as long as rates remain above it.

German DAX Technical Analysis – DAX Daily Chart

Source: TradingView, StoneX

Often, strength in the euro leads to weakness in Germany’s DAX as the export-oriented companies that make up the index may have more difficulty profitably selling their goods abroad. However, when EUR/USD is rallying primarily on US dollar weakness (and associated expectations for more easing from the Fed), the DAX can buck the trend, as we’re seeing today with the German index at record highs.

Tautologically, there are no resistance levels to watch when a market is at record highs, but using the Fibonacci extensions of the April pullback highlights 18,960 (127.2%) and 19,380 (161.8%) as levels of interest ahead of the 20,000 round figure. At this point, only a break back below previous-resistance-turned-support 18,525 would erase the near-term bullish bias in the index.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX