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EUR/USD rebound in focus, but full reversal seems unlikely

By on May 29, 2022 0

Euro Fundamental and Technical Forecast: Neutral

  • EUR/USD posted the best 2-week performance since late January
  • ECB’s more hawkish bets, Fed rate cut key factor
  • Fundamental and technical hurdles remain in the week ahead

The euro has been torn against the US dollar for two weeks. EUR/USD climbed 1.6% over the period, the strongest two-week performance since late January. You don’t have to look far to understand what’s going on here. In the chart below, EUR/USD rose as German government bond yields outperformed their Treasury equivalent.

In fact, the US dollar has fallen significantly over the past two weeks. This has increasingly been associated with more cautious comments from the Federal Reserve regarding the way forward for interest rates. We saw the markets price on most of the tightening expected in 2023. The odds of a 50 basis point hike in September have dwindled amid more cautious comments from the Fed.

Meanwhile, the European Central Bank did the opposite of the Fed. Last week, ECB Governing Council member Martins Kazaks said the central bank should not rule out half-point rate hikes. Similar comments were also heard from Board member Robert Holzmann. This contrasts with ECB President Christine Lagarde, who has a more cautious view.

Looking ahead to the week ahead, the data may explain the increasingly hawkish view of policymakers. German inflation is expected at 7.6% year-on-year in May, from 7.4% previously. Indeed, unemployment in the eurozone is expected to fall to 6.7% in April, from 6.8% previously.

However, traders should be wary of markets that could pull ahead as Fed policy expectations cool. The US unemployment rate is expected to fall further to 3.5% in May, from 3.6% previously. Average hourly wages are also expected to remain robust. This could revive the US dollar.

EUR/USD Fundamental Drivers

Chart created in TradingView

EUR/USD Technical Analysis – Daily Chart

On the daily chart, EUR/USD left neutral Doji candlestick pattern. This follows several failed attempts to remove resistance, which appears to be the 50-day simple moving average. Could this be a sign of an impending downward turn as momentum wanes? The Doji could become active in case of downward tracking. This could increase the chances of a rollover.

Such a result would emphasize the 1.0340 – 1.0388 support area. For now, the break above the March downtrend line remains active. However, the drop in resistance from May 2021 keeps the broader focus on the downside. To achieve this, one must cross the midpoint of the Fibonacci retracement at 1.0922.

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Chart created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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