EUR/USD outlook remains positive, likely heading to 1.10

What now for the dollar? That’s the key question after Wednesday’s softer data releases caused the greenback to fall across the board, underscoring the view that the economic growth is losing momentum and that inflation is heading lower. The dollar selling took a pause overnight and the greenback was stable during the first half of the European trade, ahead of the release of jobless claims data which has started to move the markets lately. We also have a few other US macro pointer to look forward to. Despite the slow start to today’s session, the recent price action and improving eurozone sentiment suggests the EUR/USD outlook remains positive, with the exchange rate on course to potentially head towards the 1.10 handle.

Before discussing the macro events in greater detail, let’s have a quick look at the chart of the EUR/USD following Wednesday’s big breakout.

EUR/USD technical analysis

Unsurprisingly, the EUR/USD has fallen back amid profit-taking after Wednesday’s data-driven rally. But with several key resistance levels broken, the path of least resistance remains to the upside.

Source: TradingView.com

The first short-term potential support level to watch is around 1.0850-1.0860 on the EUR/USD, an area which failed to offer resistance during Wednesday’s melt up, despite it being a prior support zone. Now that we have broken above here, we could well see a potential bounce around this area, which was being tested at the time of writing.

Further lower, the key support to watch is now between 1.0800 to 1.0825 area, which marks the point of origin of this week’s breakout.

On the upside, 1.0900 is likely to be the next bullish target ahead of the key 1.10 handle thereafter.

US jobless claims among data highlights

We have plenty of second-their data releases to look forward to today.

The latest jobless claims data is expected to show a drop in applications to 219K vs. 231K the previous week. We will also have the Philly Fed manufacturing index, seen dipping to 7 from 15.5 previously. What’s more, building permits are expected to rise to 1.48 million annual pace compared to 1.46m previously, while industrial production is seen printing +0.1% m/m.

EUR/USD outlook: Will the dollar selling continue?

The dollar bears, and the EUR/USD bulls, will be looking for more evidence of a cooling US economy, especially the labour market. Market expectations have shifted to anticipate two rate cuts this year for the first time in a month, although three cuts could be a possibility should the recent trend of weaker US data continues.

The above-mentioned data as well as some other second-tier data to come in the next two weeks aside, there are no major US macro pointers scheduled until the final day of the month when core PCE is released, a week before the May jobs report comes out. Until then, I would expect to see some further dollar selling but at a more gradual pace.

So, I reckon the EUR/USD is going to find buyers on the dips and edge towards the 1.10 handle.

Recent weakness in US data have inspired traders to sell into the dollar’s recovery attempts.

Wednesday’s CPI print missed expectations with a +0.3% m/m reading, and we also saw a flat headline retail sales figure, when a 0.4% increase was expected. What’s more, the Empire State Manufacturing Index painted another gloomy picture for the manufacturing sector, with yet another below-forecast negative reading (-15.6 vs. -9.9 expected).

Wednesday’s disappointing data comes after the April non-farm jobs report, the latest ISM surveys and several other pointers, all disappointed expectations earlier this month.

So, it looks like the US economic recovery is slowing, and this will help bring inflation down, reducing the need to keep monetary policy tight for an extended period of time. The Fed’s tapering of its balance sheet runoff has been an additional bearish factor for the dollar.

Dollar also weighed down by external factors

Meanwhile, external factors are also helping to weigh on the dollar. The big recovery in Chinese markets and the copper rally all seem to indicate that China has turned a corner. What’s more, we have seen improvement in Eurozone and UK data too, boosting the appeal of the euro and pound.

EUR/USD outlook: ECB likely to cut interest rates June

The European Central Bank is expected to cut rates in June, which is fully priced in. But the recent improvement in data means the central bank is likely to be far less dovish in its guidance about future rate decisions. The EUR/USD outlook is unlikely to be impacted by any further ECB talk of a June cut, as this is now baked in.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.