EUR/USD outlook: Currency Pair of the Week – May 28, 2024

EUR/USD outlook could be impacted by key inflation data from Eurozone and US
Euro makes positive start to new week as dollar falls
EUR/USD technical analysis points higher

The EUR/USD edged higher at the start of the week, adding to the gains it made on Monday and Friday. Last week, the EUR/USD was on the backfoot until Friday, when it reversed from around the key 1.08 support level. Investors are awaiting the release of key inflation data from both the US and the Eurozone this week. This data could provide insights into the timing of the first rate cuts by the ECB and the Fed, which have been delayed due to stronger-than-expected wage growth in the Eurozone and robust US business activity, particularly a sharp increase in services inflation. However, on Friday, the University of Michigan's revised inflation expectations survey showed a decrease in 1-year inflation from 3.5% to 3.3%, which pressured the dollar ahead of the long weekend. The forthcoming inflation data from both regions could have a significant impact on the EUR/USD outlook in the upcoming week.

EUR/USD outlook: German and US inflation among week’s key data highlights

Inflation takes centre stage this week. The German CPI report is due on Wednesday, followed by the Eurozone inflation numbers on Friday, the same day the US Core PCE Price Index will be released.

Recent improvements in Eurozone economic data have supported the euro. Last week, better-than-expected PMI data and an unexpected rise in Eurozone wage growth for the first quarter were reported. This wage growth, driven mainly by a significant increase in Germany, could accelerate the economic recovery. Negotiated wages in Q1 rose 4.7% year-over-year, compared to an expected drop to 4.0% from 4.5% in Q4. This situation presents a major dilemma for the ECB ahead of its June rate decision. If the German CPI also exceeds expectations this week, the rate cut could be delayed by at least one more meeting.

Additionally, the Fed's preferred inflation measure, the Core PCE, will be released on Friday, drawing attention to major FX pairs, including EUR/USD. These figures come a week before the May jobs report. Until then, the dollar may remain steady following its gains last month and this month’s decline. Concerns about stagflation are rising in the US, with persistent price pressures and mostly negative surprises in recent data, which does not bode well for the economy. The PCE data could influence the timing of the first rate cut, currently anticipated to occur well after the summer.

Here's the full economic calendar relevant to the EUR/USD pair for this week:

EUR/USD outlook: technical levels and factors to watch

Source: TradingView.com

The EUR/USD had been declining within what appears to be a short-term bullish flag continuation pattern, until it broke out of it at the start of this week. Thus, today’s further upside makes technical sense.

The underlying trend appears bullish following the break of the bearish trend line that had been in place since December. The bulls will remain content as long as the key support around the 1.0800 area holds. Short-term resistance is at 1.0885-95, which was being tested at the time of writing. Here, the EUR/USD topped in April and found resistance in the last couple of weeks. A clean breakout above here could pave the way for a potential rise towards the March high of 1.0981 and subsequently the 1.10 handle.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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