EURUSD Rates Week in Review

Last week, our technical indicators suggested to go Short on EURUSD at or above 1.03, setting a Stop Loss at 1.05, and go Long at or below 1.02, setting a Stop Loss at 1.00.

This week, EURUSD price range was 1.0185 high, set this past Monday, and 0.9998 low, set yesterday, Wednesday. Indeed and as predicted by our technical analysis, in last week article, the currency pair has finally reach parity. So, Monday, we could have bought the currency pair at 1.0036, selling it on an intraday trading at 1.0183, for 1.46% profit. Tuesday, we could have bought it at 1.00, selling it on an intraday trading at 1.0072, for 0.72%. Wednesday, we could have bought it at 1.00, selling it on an intraday trading at 1.0121, for 1.21% profit. Thursday, we could have bought it at 1.0004, selling it on an intraday trading at 1.0048, for an extra 0.44% ROI.

 Fundamental Overview

EURUSD has lost its traction after having recovered above 1.0100 on Wednesday and retreated toward parity early Thursday. The pair has been holding above that level since the beginning of the week but it looks increasingly more likely for it to violate that support amid widening policy divergence between the Fed and the European Central Bank (ECB).

The data published by the US Bureau of Labor Statistics revealed on Wednesday that annual inflation in the US, as measured by the Consumer Price Index (CPI), climbed to its highest level in four decades at 9.1% in June. This print followed May’s print of 8.6% and came in higher than the market expectation of 8.8%.

Commenting on the data, Atlanta Fed President Raphael Bostic told Bloomberg that June inflation report was concerning and added that everything was in play for policy action at the next meeting. According to the CME Group FedWatch Tool, markets are now pricing in a nearly-80% probability of the Fed hiking its policy rate by 100 basis points in July.

On the other hand, the ECB is yet to raise its policy rate for the first time since 2011. According to Reuters, money markets price in a total of 95 bps of ECB hikes by September, up from 84 bps on Monday. Despite this development, tt’s clear that the bank remains well behind the tightening curve. In fact, the Bank of Canada hiked its policy rate by 100 basis points on Wednesday, highlighting major central banks’ urgency to front-load rate increases to battle inflation.

In the second half of the day, the weekly Initial Jobless Claims and the Producer Price Index data will be featured in the US economic docket. Meanwhile, US stock index futures are down more than 1% during the European session, suggesting that Wall Street‘s main indexes are likely to open deep in negative territory. In case safe-haven flows continue to dominate the market during the American trading hours, the dollar should continue to outperform its rivals.

Technical Analysis

EURUSD is trading under pressure below 1.0050, defending parity so far this Thursday. The euro shrugs off bleak EU Commission economic forecasts. Rising odds of a 100 bps Fed rate hike this month are boosting the US dollar and yields ahead of PPI data.

The technical picture shows that EURUSD remains bearish in the short term with the Relative Strength Index (RSI) indicator on the four-hour chart staying below 40. Additionally, the pair failed to make a four-hour close above the 20-period SMA despite rising above that level on Wednesday.

On the downside, 1.0000 (static level, psychological level) aligns as key support ahead of 0.9950 (static level from November 2002) and 0.9900 (psychological level). On the other hand, 1.0050 (20-period SMA) aligns as interim resistance before 1.0100 (psychological level, static level) and 1.0150 (50-period SMA, static level).

For next week, The EUR has had a bumpy ride over the past few months. At the onset of the war in Ukraine, the EUR tumbled across the board. However, in recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank confirming at least a 25bsp hike for July and possibility of a 50bsp hike in September. Despite the hawkish policy shift, the concerns over fragmentation in bond spreads (BTPBund) as well as fears of growing stagflation risks has seen the EUR struggle to hold onto any hawkish ECB momentum.

The ECB did try to comfort spread concerns with promises of a new fragmentation tool, and even though it has kept spread from widening further, concerns remain. If the bank can convince markets that their new spread tool(s) can stop fragmentation it should be supportive for the EUR. The bank did back up their attempts at calming fragmentation fears after an ad-hoc meeting by saying they are looking at introducing an additional ‘tool’ as quick as possible, so markets will be focused on any insights into what that tool might be.

Even though growth data has been surprisingly resilient in the past few months, the recession fears ramped up as recent growth data surprised meaningfully lower for key members like Germany and France. Based on the forward-looking signals from leading indicators, we believe recession is likely in the EZ and that the narrative has turned more bearish for the EUR until that improves.

POSSIBLE BULLISH SURPRISES
Geopolitics remains a focus for the EUR, where any possible de-escalation or cease fire in the Ukraine war would open up a lot of appreciation for the EUR. Stagflation fears are high, with growth expected to slow while inflation stays high. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data (ZEW data this week) could spark upside.

Even though the ECB’s recent communication has been enough to push BTP/ Bund spreads from their recent highs the concerns remain. Thus, any insights or clarity regarding their new tool that convinces markets it can solve fragmentation should be supportive for the EUR.

POSSIBLE BEARISH SURPRISES
Spread fragmentation remains in focus, and if the ECB fail to calm fears or even walks back on recent hawkish comments it could trigger bearish reactions in the EUR. Flash PMIs confirmed fears of possible recession. We expect growth concerns to continue weighing on the EUR and means incoming growth data (ZEW data this week) will be in focus, where any major negative surprises could trigger downside. Watch for those hike expectations. With a lot of froth recently baked into STIR markets for the ECB, we’ve seen a chunky repricing in hike expectations over the past three weeks, and any further lower repricing is expected to weigh on the EUR.

BIGGER PICTURE
The fundamental outlook for the EUR has shifted to bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. There are bearish and bullish factors in play right now though.

On the bearish side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy as a possible supportive driver. We do think the disappointing data does open up a narrative change for the EUR which will require more market participants to change their forecasts to reflect higher risk of recession, and that should weigh on the EUR.

USD FUNDAMENTAL OUTLOOK: BULLISH
Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening.

However, as a result of increasing fears of a growth slowdown (as evidenced by recent econ data), STIR markets have repriced lower, and now expects a terminal rate of 3.3% (versus >4% before the June FOMC meeting).

As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further, outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices, rising inflation expectations and upside surprises in inflation data this week could also trigger further USD bullish reactions.

Hence and for next week, our technical analysis are suggesting to go Short on EURUSD at or above 1.0150, setting a Stop Loss at 1.03081, and to go Long at or below 1.02, setting a Stop Loss at 0.9850.

As of 12:23 AM (GMT), the EURUSD was trading at 1.0058.

EUR to USD forecast for tomorrow: Euro to Dollar forecast on Friday, July, 15: exchange rate 1.0082 Dollars, maximum 1.0233, minimum 0.9931. EUR to USD forecast on Monday, July, 18: exchange rate 1.0079 Dollars, maximum 1.0230, minimum 0.9928. Euro to Dollar forecast on Tuesday, July, 19: exchange rate 0.9939 Dollars, maximum 1.0088, minimum 0.9790. EUR to USD forecast on Wednesday, July, 20: exchange rate 0.9951 Dollars, maximum 1.0100, minimum 0.9802.

In 1 week, Euro to Dollar forecast on Thursday, July, 21: exchange rate 0.9930 Dollars, maximum 1.0079, minimum 0.9781. EUR to USD forecast on Friday, July, 22: exchange rate 0.9852 Dollars, maximum 1.0000, minimum 0.9704. Euro to Dollar forecast on Monday, July, 25: exchange rate 0.9701 Dollars, maximum 0.9847, minimum 0.9555. EUR to USD forecast on Tuesday, July, 26: exchange rate 0.9707 Dollars, maximum 0.9853, minimum 0.9561. Euro to Dollar forecast on Wednesday, July, 27: exchange rate 0.9653 Dollars, maximum 0.9798, minimum 0.9508.