Is the EUR/USD Bear Market Rally Coming to an End?

Euro Latest –  EUR/USD Nudges Higher as German Inflation Continues to Soar
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EUR/USD TALKING POINTS

  • ECB tightening remains supported.
  • ECB and Fed speeches.
  • U.S. Manufacturing PMI in focus.

EURO FUNDAMENTAL BACKDROP

The euro has enjoyed some much needed respite since mid-May after extended long positioning on the U.S. dollar faded. Yesterday’s oil embargo on Russia has now heightened fears of further downward growth revision within the euro zone despite inflation data showing no signs of relief. This has prompted money markets to price in further rate hikes (see table below) all the way through to 2023 which may be unlikely as the economic outlook for the region remains skewed to the downside.

ECB INTEREST RATE PROBABILITIES

Source: Refinitiv

A positive start for the EU in terms of economic data this morning began with its May PMI release of 54.6 which marginally exceeded expectations, maintaining an overall expansionary stance. Unemployment for April remained low printing in line with the 6.8% forecast. Looking ahead the ECB’s President Christine Lagarde is scheduled to speak (see calendar below) while markets await the much anticipated ISM Manufacturing PMI figure which has been on the decline of recent.

EURUSD economic calendar

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

daily eurusd chart

Chart prepared by Warren Venketas, IG

EUR/USD price action seems to be testing the medium-term downtrend (black) which coincides with the 1.0800 psychological level as well as the RSI’s 64 level (green) which has yet to be breached in 2022.

With fundamentals favoring a likely EU growth decline (regardless of the current hawkish pressure), I think that the U.S. economy (and therefore the dollar) remains the preferred currency in my view. I will be looking for subsequent support targets unless we see a daily candle close above the 1.0800.

Resistance levels:

  • 100-day EMA (yellow)
  • 1.0800/trendline resistance (black)

Support levels:

  • 50-day EMA (blue)
  • 20-day EMA (purple)

IG CLIENT SENTIMENT DATA: BULLISH

IGCS shows retail traders are currently LONG on EUR/USD, with 57% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, recent changes in long and short positioning result in an upside bias.

Contact and follow Warren on Twitter: @WVenketas



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