Will central bank heavyweights trigger a EURUSD breakout? :: InvestMacro


Watch this space because the EURUSD may fluctuate over the next few days!

Investors will get a bewildering mix of major economic reports and speeches from policy makers this week. However, the main track and potential market disruption may be the three-day ECB forum in Sintra Portugal which kicks off today. The forum will focus on “Challenges to Monetary Policy in a Rapidly Changing World” with a panel discussion on Wednesday focusing heavily on heavyweight central banks.

Before we think about what to expect from the major events and EURUSD in the coming week, it is worth keeping in mind that the Euro has risen against most of the G10 currencies in the quarter so far. But against the strong dollar, the currency fell nearly 4.7% due to the European Central Bank’s lagging behind the Federal Reserve, which moved aggressively to tame inflation.

Taking a quick look at the technical picture, EURUSD is balancing above the important 1.0400 support level on the monthly time frame. The last time prices secured a monthly close below this level was in December 2002.

The trend is massively bearish on the weekly time frame as there have been lower lows and lower highs constantly.

Now, this is where things get interesting.

On the technical charts, the EURUSD is still in a bearish trend with the widening of policy divergence between the European Central Bank and the Federal Reserve supporting the bears of the past. However, the European Central Bank recently joined the hawkish camp and informed the markets that it plans to raise interest rates by 25 basis points in July. In fact, the central bank could also go ahead with a 50 basis point hike in September as it battles the inflation monster! Such a development is likely to favor EUR bulls – limiting downside losses for EURUSD.

Next week: Data, policy makers, and more…

Grab your popcorn and find a comfortable seat because the show is about to start.

On Tuesday, San Francisco Fed President Mary Daly will be in the spotlight. Last Friday, she said another 75 basis point rate hike in July is the “starting point” but if the economy slows more than expected, 50 basis points may be reasonable. Investors will also be provided with US consumer confidence data for June which is expected to deteriorate further.

Several Federal Reserve officials will appear on Wednesday.

With that said, the main risk event will be the European Central Bank Committee which includes ECB President Christine Lagarde, Fed Chairman Jerome Powell and Bank of England Governor Andrew Bailey.

Investors will be watching the panel closely for fresh insights into how central bank chiefs plan to fight inflation as they attempt to engineer a soft landing for the global economy. Given how highly sensitive markets remain to expectations of rate hikes, any new evidence about future rate hikes could lead to new volatility in the FX space. On the data front, Eurozone economic confidence, German inflation numbers for June, and the third US Q1 GDP numbers will also be released.

On Thursday, it’s all about the Eurozone unemployment numbers for May which are expected to remain unchanged at a record low of 6.8%. In the US, weekly initial jobless claims, personal income/spending and the PCE deflator for May are likely to grab the spotlight in the afternoon.

Given that the core personal consumption expenditures (PCE) index is the Fed’s preferred measure of inflation, this will be closely scrutinized by market players.

According to a Bloomberg survey, the core PCE contraction index is expected to cool to 4.8% in May from 4.9% seen the previous month. If expectations match reality, it could fuel speculation about peaking inflation – lowering rate hike bets and weakening the dollar.

At the conclusion of the week, the Eurozone CPI and manufacturing PMI numbers for June will be published. Eurozone inflation is estimated to have reached 8.5% in June, up from a record high of 8.1% in May. If the reports meet expectations, it could boost speculation that the European Central Bank will adopt a tough approach towards raising interest rates to fight inflation. Such a development could strengthen the euro. We also have the US ISM Manufacturing and Global Manufacturing PMI for the US for June on Friday afternoon which may show how the US economy is coping amid a strong Fed rate-raising cycle.

With so much going on this week, EURUSD has the potential to send investors off on an accelerated journey!

Is EURUSD preparing to break out of the range?

Over the past few weeks, EURUSD has been trapped in a wide range with support at 1.0350 and resistance at 1.0780. Although the overall trend is still bearish, it appears that there is a struggle between the bulls and the bears and this is still being reflected in the price action.

There are two scenarios that could occur on the EURUSD in the coming week.

  1. Strong breakout and daily close above 1.0630 may lead to a rise towards 1.0780 and 1.0920.

  1. Prices failed to overcome the 1.0630 resistance, which led to a decline towards 1.0480, 1.0350 and 1.0200.

  1. Prices are still trapped inside the support level of 1.0480 and the resistance level of 1.0630 with the possibility of a decline towards 1.0350.



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