Will we Complete the Rebound?

The EUR/USD exchange rate trimmed May’s losses in last week’s trading, but the rise has already stopped near a stubborn level of technical resistance on the charts. The rebound of recent global market gains and other factors may lead to a decline in the single European currency again towards 1.08 over the coming days. The gains of the recent bullish rebound for the EUR/USD currency pair reached the 1.0970 resistance level closest to testing the psychological resistance 1.1000.  The gains stopped and returned to stability around the 1.0920 level at the time of writing the analysis. The pair is waiting for strong incentives to complete the rebound or return to its broader downward path.

The European single currency – the Euro – posted its biggest gains this year last week as financial markets responded to less bleak economic growth forecasts from the European Central Bank (ECB) and perhaps also openness to further interest rate increases in the Eurozone over the coming months.

Commenting on this, Carol Kong, an economist and currency analyst at the Commonwealth Bank of Australia, says: “Lagarde’s comments encouraged the OIS market to price in two additional 25 basis point rate hikes in ECB policy.” “Also supporting the euro is an improvement in the current account situation for Europe due to lower energy prices,” she added. But we expect EUR/USD to remain below the May 2023 high of 1.1095.”

The euro and other major currencies seem to have benefited as the dollar fell last week after the People’s Bank of China (PBOC) cut interest rates amid market and media speculation about a massive government stimulus to revive the country’s flagging economic recovery. But the problem or risk for the euro is that at least some of the recent tailwinds will either become or remain a dampening headwind this week and drive the EUR/USD rate back to levels that would closely align with the yield spread of German and  US government bond yields: somewhere around 1.07.

This scenario would be especially likely if S&P Global surveys of European manufacturing and service sectors offset economists’ expectations on Friday, or if the dollar was cheered on Wednesday or Thursday by US rate-related congressional testimony from Federal Reserve (Fed) Chairman Jerome Powell.

All eyes will be on the European services sector on Friday in order to gauge whether the recovery in activity indicators for this year has continued into June as this will increase the risks of positive real wage growth or the inflation rate which could have repercussions on the ECB’s inflation expectations. For her part, Christine Lagarde, the governor of the European Central Bank, said, “Wage pressures, although they partly reflect one-time payments, are becoming an increasingly important source of inflation. Compensation per employee increased by 5.2 percent in the first quarter of the year and wage negotiation increased by 4.3 percent.

“Moreover, companies in some sectors have been able to keep profits relatively high, particularly when demand has outstripped supply. Although most measures of longer-term inflation expectations are currently around 2 percent, some indicators are still high and need to be watched closely.

In general European wage increases were just shy of 0.1% in the first quarter from the 5.3% core inflation rate recorded for June, suggesting parts of the economy are rapidly catching up to the inflation seen in recent years. Last week’s upgrades to the European Central Bank’s economic growth forecasts indicate that this could last a little longer in Europe. But that possibility, pricing expectations for interest rates from the ECB and the Euro could all be sensitive to any signs of moderate momentum in services while in the meantime, a depreciating RMB would be a risk to EUR/USD if the stimulus in China plays out as well. It does not materialize or focus instead on stimulating domestic production.

• There is no change in my technical point of view for the performance of the price of the EUR/USD currency pair, only the performance on the daily chart below.
• The bullish shift in the euro/dollar continues, testing the psychological resistance level 1.10 will be important for the bulls to control the direction.
• This may push the currency pair towards stronger ascending levels.

 On the other hand, it broke the support level 1.0840, a return to control the bears on the trend again. I expect the currency pair to move in narrow ranges until the reaction from the market drivers represented in the testimony of US Central Bank Governor Jerome Powell and the readings of the European manufacturing and service sectors.

Ready to trade our Forex daily analysis and predictions? Here are the best regulated trading brokers to choose from.