EURO FORECAST:
- EUR/USD gains amid improved market sentiment
- Softening US yields and Fed monetary policy repricing weigh on the U.S. dollar and further supports the euro
- This article looks at EUR/USD key technical levels to keep an eye on in the near term
Most Read: US Dollar Down, Vol Down, Stocks Up After May FOMC Minutes. Now What?
The U.S. dollar, as measured by the DXY index, had one of its best starts to the second quarter in a while, bolstered by the Federal Reserve’s hawkish posture, but gains from April and May are slowly unraveling as U.S. Treasury rates continue to correct lower.
Earlier this month, both the 2-year and 10-year yield hit multi-year highs at 2.85% and 3.20% respectively, but now trade more than 40 basis points below those levels, in part on speculation that the Fed will have to slow tightening in the not-too-distant future, amid fears of a hard landing for the economy.
US YIELDS VS US DOLLAR
Source: TradingView
The shift in expectations is also evident in the futures markets. For example, the implied yield on the June 2023 Eurodollar contract, which is what traders estimate the cost of borrowing will be at that time, is down about 70 basis points to 3.10% from its peak of three weeks ago.
The ongoing repricing of Fed monetary policy outlook has boosted the euro in recent days, allowing it to stem its bleeding against the U.S. dollar. That said, EUR/USD is up 0.4% to 1.0724 on Thursday at the time of writing, but it has managed to bounce about 3.5% from its 2022 lows, although it has not yet been able to overcome technical resistance in the 1.0750 area.
Looking ahead, the common currency may continue to gain more ground against the greenback, but its upside should be limited. Two bullish catalysts come to mind at this point.
First, the U.S. central bank has signaled that expediting the withdrawal of accommodation in the near term through two additional 50 bps hikes would leave the committee “well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments”.
The previous assessment from the May FOMC minutes suggests that policymakers could be open to pause the cycle at its September gathering as indicated by Atlanta Fed Raphael President. While the situation could certainly change amid elevated uncertainty around the inflation profile, the possibility of a pause could weigh on the greenback.
On the euro’s side of the equation, the ECB is turning increasingly more hawkish compared to a few months ago. The bank now endorses speeding up policy tightening and exiting negative interest rates by the end of the third quarter. This pivot could soon open the door to supersize 50 bps hikes and add support to the European currency, or at the very least, prevent it from more depreciation. On balance, however, the stars seem to be aligning for a further EUR/USD recovery heading into the summer.
EUR/USD TECHNICAL ANALYSIS
EUR/USD is approaching its best levels since late April after gains notched over the last couple of weeks. With the latest advance, the pair appears poised to retest a cluster resistance, spanning from 1.0750 to 1.0800. If bulls manage to breach this ceiling to the upside, buying interest could accelerate, paving the way for a move towards 1.0940. On the flip side, if sellers resurface and price inflects lower, initial support rests at 1.0642, followed by 1.0470.
EUR/USD TECHNICAL CHART
EUR/USD Chart Prepared Using TradingView
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—Written by Diego Colman, Market Strategist for DailyFX
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