EUR/USD forecast: Currency Pair of the Week - June 10, 2024

The EUR/USD fell more than 60 pips while French banking stocks took a battering in response to the weekend’s surprise election results in the European Parliament, prompting French President Macron to call on a snap election in order to halt the rise of rival and far-right Marine Le Pen. The uncertainty has weighed on risk assets for now, but the market’s focus is likely to shift swiftly. As far at the EUR/USD forecast is concerned, there is the US dollar to consider too, which is subject to heightened volatility as we have US CPI and the Fed’s rate decision coming up on Wednesday.

Video: EUR/USD forecast and insights on AUD/USD, USD/CAD and WTI 

EUR/USD forecast: Fallout from EU election hits single currency

The markets have reacted negatively with both the CAC and euro falling following European elections turmoil and France's decision to call a snap election. Markets generally don't like uncertainty and not when far-right parties are making gains across Europe, especially in Austria, Italy and Germany. However, these types of moves tend to fade quickly, and I wouldn't be surprised if that happens again once we head deeper into the trading week. However, it may lower the longer-term EUR/USD forecast, should support for the far-right governments rise further across the board, leading to policies that are potentially damaging to the economy.

Investors no longer pessimistic on Eurozone for first time since Feb 2022

The euro was also hurt by a surprise 1% drop in Italian industrial production as was reported this morning, which overshadowed the small rise in investor optimism. The closely watched Sentix Investor Confidence barometer rose to 0.3 in June from -3.6 (pessimistic) the month before. This is a survey of about 2,800 investors and analysts, which asks respondents to rate the relative 6-month economic outlook for the Eurozone. The fact that we have now risen back to the optimistic territory, can only be a good thing, even if it has just about climbed back above the zero line. It means that investors are no longer pessimistic on the Eurozone outlook for the first time since February 2022. This follows stronger recovery across a swathe of Southern Europe. Greece, Spain and Portugal have become the Eurozone’s outperformers.

Meanwhile, today’s US economic calendar is a bit quiet, but there are plenty of macro events taking place later in the week that could help drive the markets.

US CPI is this week’s key data release after a strong NFP

It is all about the timing of the first Fed rate cut, which has been pushed around significantly throughout this year. Initially, markets had expected the rate cut to come in June, before a series of stronger data releases pushed it to December and recently, we have seen a few mixed data releases and it is now expected to be September. On Friday, the US dollar rallied on the back of strong US non-farm payrolls report, which caused yields to rise again.

The headline non-farm payrolls rose by 272,000, which was much stronger compared to expectations. While this was offset slightly by downward revision to April’s figure and the unemployment rate unexpectedly climbing to 4.0%, average wages came in hotter at +0.4% m/m. The data suggests the jobs market is not cooling as fast as indicated by other labour market data released in recent days. With aages remaining strong, this will discourage the Fed to start cutting rates sooner than September, at the earliest.

This week’s CPI report could have significant implications on the market’s expectations about the first rate. This could potentially cause sharp moves in gold, stock indices, and the dollar, and therefore impact the EUR/USD forecast.

CPI is expected to have increased 0.1% month-over-month in May, which, if correct, should keep the year-over-year rate unchanged at 3.4%. Core CPI is expected to show another 0.3% month-over-month increases, similar to April.

FOMC seen holding rates unchanged

Thanks to elevated inflationary pressures and hawkish Fed rhetoric, the market is no longer expecting Wednesday’s FOMC meeting to be a live one. The timing of the first Fed rate cut has been pushed back and now expected to happen in September. Overshadowing the FOMC meeting is the potential for the May CPI report, due for release earlier in the day, to deviate from expectations. Else, if the Fed provides the strongest hint yet of a September cut then that could move the markets in the positive direction, as this will help reduce uncertainty. For what it is worth, I reckon the Fed will once again imply a “data-dependant” approach than pre-committing to a cut. However, if the Fed Chairman turns out to be more dovish than expected, then this should create a sell-off in the dollar, given that Friday’s strong US jobs report and the ISM services PMI have both helped to ease expectations over an economic slowdown.

Here's the full list of this week’s key macro events relevant to the EUR/USD pair:

EUR/USD forecast: Technical levels to watch

Source: TradingView.com

The EUR/USD forecast is subject to change, potentially drastically, given the importance of this week’s macro events, mentioned above. For now, the short-term path of least resistance is to the downside with rates breaking below key support and the 200-day average around 1.0785 -1.0805 area. This zone is now going to be the most important short-term resistance to watch. On the downside, 1.0700 looks to be next target for the bears, followed by the potential bullish trend line that is derived from connecting the lows of October last year and April of this year, around 1.0650.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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