The exchange rate of the euro against the dollar EUR/USD entered trading of the new week, stable near its lowest level in three months. It reached the support level 1.0675, before settling around the level of 1.0725 at the time of writing the analysis, but it may reach its lowest level on the charts this week if the difference settles. The single European currency succeeded in staying above the nearby technical support level during the coming days.
The European single currency – the euro – fell from a one-year high against the dollar in early May to a three-month low near 1.0640 last Wednesday when weak German inflation figures sent domestic bond markets higher and put more pressure on the yield spread. Overall, yield differentials have sent the euro lower over the past month amid investors’ hawkish reassessment of US interest rate expectations from the Federal Reserve (Fed), but they may have now eased as far as possible and could have room to recover in favor of the single currency.
Commenting on this, Francesco Pessol, forex analyst at ING Bank, says: “A possible pause in the rebound in short-term USD swap rates means that the two-year EUR/USD swap rate gap may also find some relief after the collapse from -62 basis points to – 116 basis points in the past four weeks. The analyst added, “We feel that EUR/USD may find some support around 1.0650/1.0700 and even rebound to 1.0800/1.0850 this week.”
Overall, last Friday’s May non-farm payroll report in the US provided reason to believe that the yield differential might be bottoming out revealing that last month’s strong payroll growth of 339K was accompanied by a large number of layoffs. This has made the labor market appear calm, if not about to collapse, and was the clearest indication yet of the Fed’s success in its attempts to reduce demand for workers and dampen wage growth as part of its broader effort to ensure inflation returns to the 2% target.
If the US jobs data signals the beginning of a trend, it could put a question mark on investors’ expectations for another Fed rate hike next month and possibly influence market prices for an eventual rate cut with supportive effects on bond spreads and the euro. But in the meantime, the euro is likely to take its cues from the Tuesday and Wednesday releases of European retail sales and German industrial production data for April, which are highlights of the economic calendar ahead of the US inflation report for May next Tuesday.
Commenting on this, Silvia Ardajna, Chief European Economist at Barclays, says, “European Commission surveys indicate downside risks to our lackluster forecast for eurozone growth at 0.1% q/q in the second quarter. This, together with the continued slowdown in inflation and the transmission of monetary policy, brings the end of the ECB tightening cycle in sight.”
Next week’s US inflation data will be pivotal to whether the Federal Reserve raises US interest rates again anytime soon, but European data will also be important to help determine whether the ECB’s negative deposit rate eventually reaches the 3.75% you had projected
- According to the performance on the daily chart below, the general trend of the EUR/USD currency pair is still bearish.
- Attempts to reverse the trend are still weak and lack strong momentum.
- According to the current performance, the bears moved in the currency pair towards the support level at 1.0660, which will support the strength of the current trend and warn of a deeper bearish move.
- At the same time move the technical indicators towards strong oversold levels.
The euro-dollar currency pair does not await impressive US data today, and from the eurozone, German factory orders and retail sales will be announced for the bloc countries.
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