- EUR/USD remains resilient after dipping below 1.05, hinting at a potential breakout.
- Weak US data and stagflation fears fuel Fed rate cut bets, pressuring the dollar.
- A break above 1.0500 could pave the way for gains toward 1.0600.
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The EUR/USD slipped back below the 1.05 handle first thing this morning, but the losses were limited, and the pair still seemed on course to climb above this psychologically important hurdle more decisively in the days ahead. The recent weakness in US data and bond yields points to a weaker outlook for the greenback, countering the positive impact of Trump’s inflation-boosting policies on the dollar.
US Dollar Rebounds but Recent Data and Price Action (WA:ACT) Have Been Bearish
While the Dollar Index was trading higher this morning, it remains to be seen whether it can hold onto its gains. In recent days, we have seen US bonds surging amid weakness in data. Yesterday another disappointing US consumer confidence reading heightened concerns about the health of the world’s largest economy. After last week’s poor University of Michigan survey, it was the Conference Board’s Consumer Confidence Index posting its largest decline since August 2021, which further fuelled fears of an economic slowdown.
The data saw money markets fully pricing in two quarter-point rate cuts by the Federal Reserve this year. This came after revised data on Friday showed the UoM Consumer Sentiment index falling to 64.7 from 67.8 reported initially. Some of the other softer-than-expected data we have seen recently include the S&P Global flash services PMI falling back into contraction at unexpectedly, and a sizeable 4.9% drop in existing homes sales.
Alongside weaker data we have also seen signs of rising long-term inflation expectations amid tariff talks, all helping to raise stagflation fears. On Friday, US long-term inflation expectations hit a 30-year high in the University of Michigan survey, printing 3.5% - that’s what consumers think inflation will be 5 years from now.
Key Events to Watch for the Rest of This Week
Well, the macro calendar is quite quiet today, but we do have US new home sales, before the attention turns to the main event of the week: Nvidia (NASDAQ:NVDA) earnings. On Thursday US GDP and initial jobless claims will be released and there will speeches from multiple Fed officials. On Friday, the focus will turn to the Fed’s favorite inflation measure - core PCE price index, and we will have a couple of other second-tier data.
What About the Euro?
Holding the EUR/USD exchange rate back is lingering tensions between the US and Europe amid concerns over Trump’s stance on tariffs, coupled with uncertainty over the Ukraine peace process talks. Not that data has been any great, as we saw in last week’s Eurozone PMIs and this week’s German ifo Business Climate and GfK Consumer Climate. But with the German election uncertainty out of the way, and the peace talks over Ukraine continuing, this should keep the euro’s weakness limited, even if incoming data continues to point to a struggling Eurozone economy that requires looser monetary policy from the European Central Bank.
EUR/USD Key Levels to Watch
The EUR/USD remains confined to a range, though a potential breakout could be on the cards. If recent price action is anything to go by, dip-buying has been the key theme in this pair and other dollar majors like the AUD/USD. The EUR/USD held key support in the 1.0400–1.0430 region last week, which helped to push rates above the 21-day exponential average and solidified the pair above the short-term bullish trend line.
Source: TadingView.com
Resistance on the EUR/USD has been provided around 1.0500 region, though the force of the selling pressure there has been progressively less around these levels. This, coupled with the formation of higher lows suggests there is some underlying buying interest, despite the broader technical EUR/USD outlook remaining somewhat uncertain.
What the bulls would like to see now is some further bullish price action and a decisive break above the 1.0500 area to mark a shift in sentiment. If this happened, it would potentially pave the way for follow-through buying towards the next resistance at 1.0600 and, if momentum builds, even 1.0700 thereafter.
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