EUR/USD forecast remains murky ahead of key events

The US dollar, already giving back some of its gains from Wednesday, fell a little further on the back of today’s US data releases that, among other things, showed a slight downward revision in GDP and an uptick in jobless claims. The EUR/USD, which had been on the backfoot ever since Tuesday when it failed to break key resistance around 1.0885 area before slumping on Wednesday on the back of weaker-than-expect German CPI data and a decent dollar rally, edged higher to around 1.0830 following the latest US data releases. The EUR/USD forecast remains murky in the short-term outlook, but brighter in the longer-term horizon.

EUR/USD forecast: Eurozone CPI, US PCE, ECB rate decision and NFP all to come

The single currency was bouncing back already in the first half of Thursday’s session thanks to slightly stronger Eurozone data released earlier in the day. Today’s recovery in the EUR/USD means a chunk of Wednesday’s losses have now been recouped. The EUR/USD and other major currency pairs all slumped on Wednesday as the US dollar strengthened across the board, thanks largely to rising bond yields and a bit of risk off sentiment in global stocks. Attention will turn to the upcoming core PCE price index on Friday, when we also have Eurozone CPI to look forward to. The following week, we have an ECB rate decision and the May jobs report from the US. Ahead of these macro pointers, the EUR/USD remains stuck inside a relatively tight 100-pip range.

What next for the dollar?

In the first half of Thursday’s session, the US dollar was giving back some of its gains made on Wednesday, when it was boosted by rising bond yields. It looks like investors are increasingly worried about the possibility of interest rates staying elevated for a longer period. Whether or not that sentiment will change materially again will be dependent on the upcoming PCE inflation data and the direction of bond yields on Friday.

Today’s slightly weaker US data releases are unlikely to cause too much of selling pressure on USD. The revised first-quarter US GDP data for 2024 was expected to show a downward revision, to an annualised growth rate of 1.2%. But it came in at 1.3% from the initially reported 1.6%, which was nonetheless ignored by the market as the GDP Deflator was revised lower to 3.0% compared to 3.1% expected and last.

Meanwhile, the latest weekly jobless claims figures were projected to remain steady around the 215K-220K range, and so it proved, albeit in the higher end of this range at 219K. Pending home sales, due later, are anticipated to show a 1.1% drop.

With today’s data releases overall slightly weaker, the bond market sell-off has taken a breather. But the trend could resume which may well provide additional boost for the dollar, and potentially hurt the EUR/USD later on today or this week.

This week’s earlier sell-off in bond yields had been partially driven by an unexpected rise in US consumer confidence for May and weak auctions of US Treasuries. The Federal Reserve’s continued hawkish stance has also supported the dollar and yields, with several officials downplaying the likelihood of an early rate cut in recent speeches.

EUR/USD forecast: ECB set to cut rates next week

The EUR/USD is in an overall consolidation mode as investors await the release of key inflation data from both the US and the Eurozone on Friday. The data could provide insights into the timing of the first rate cuts by the ECB and the Fed, which have been continually pushed back.

In the Eurozone, we have had some stronger-than-expected data of late – PMIs and wage growth last week, while today the unemployment rate fell to a new all-time low of 6.4% compared to 6.5% expected. Last week, we saw negotiated wages in Q1 rose 4.7% year-over-year, compared to an expected drop to 4.0% from 4.5% in Q4.

The improving macro data and high wages presents a major dilemma for the ECB ahead of its June rate decision. However, judging by this week’s German and Spanish CPI reports, the rate cut may go ahead anyway given that the ECB has built it up so much. If the ECB then decides not pre-commit to further loosening this year, then that’s something that would probably more than outweigh the rate cut decision itself.

Core PCE index key data for US dollar

The Fed's preferred inflation measure, the Core PCE, will be released on Friday, drawing attention to major FX pairs, including EUR/USD. These figures come a week before the May jobs report. Until then, the dollar may remain in a holding pattern. The PCE data could influence the timing of the first rate cut, currently anticipated to occur well after the summer.

Here are the key data releases relevant to the EUR/USD pair to watch out for on Friday.

EUR/USD forecast: Technical analysis

Source: TradingView.com

The EUR/USD remains stuck in consolidation, unable so far to climb decisively above April’s high of 1.0885, while on the downside support around the 1.0785 – 1.0800 area continues to hold.

The underlying trend seems to be modestly bullish after breaking the bearish trend line that had been established since December. The bulls will remain satisfied as long as the key support around the 1.0800 level holds.

In the short term, resistance is at 1.0885-95, which held after being tested earlier this week. This is the same area where EUR/USD peaked in April and encountered resistance over the past few weeks. A decisive breakout above this level could open the path for a potential rise toward the March high of 1.0981 and subsequently the 1.10 level.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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