EUR/USD outlook hinges on key upcoming macro events – Forex Friday

The US dollar has been in a holding pattern all week, with traders unwilling to commit in either direction ahead of this week’s key macro highlight: Core PCE Price Index. Finally, the data will be released shortly and could spark a sharp move in the US dollar in the event of a sizeable deviation from expectations. This has the potential to impact the EUR/USD outlook, with the ECB rate decision and US non-farm payrolls report next week also in sharp focus.

Core PCE up next

Investors are reacting to each piece of important US macro data given the fact the Fed is data dependent. So, let’s see whether the April core PCE deflator deviate away from the consensus 0.3% month-over-month reading. We also have US personal spending and income to look forward to, with the data being released at the same time as the core PCE index. These figures are also expected to print 0.3% month-over-month respectively.

But it will be the core PCE index that will have the biggest impact on the FX markets. A weaker number should weigh on the US dollar, especially against currencies which have shown resilience lately, such as the euro. On the other hand, if the data indicates that the Fed will continue to be mired in persistent inflation, this could lead to a rally in the dollar, especially against currencies where the central bank has turned dovish or where interest rates are low – such as the Japanese yen

EUR/USD outlook boosted as Eurozone inflation data comes in hotter

Earlier, Eurozone inflation data for May came in hotter than expected, sending the EUR/USD and euro crossed higher. Headline CPI rose to 2.6% y/y from 2.4% in April, beating the expected 2.5% reading. Core CPI climbed to 2.9%, higher than 2.7% expected and last. The stronger CPI data is unlikely to deter a rate cut next week, but the path of monetary policy beyond next week’s meeting is now more uncertain. Traders are now pricing in two rate cuts in total this year, with just a 25% chance of a third. ECB officials such as Chief Economist Philip Lane have indicated that a rate cut is becoming appropriate, with Lane saying inflation is set to “bounce around” this year.

The EUR/USD outlook is going to be become more clearer next week, when we have the ECB’s policy decision on Thursday, with US jobs report to come a day later on Friday.

ECB seen cutting rates by 25 basis points despite hot CPI

On Thursday, June 6, the European Central Bank is expected to deliver its first rate cut of the year. The key question is how many more will follow, if any?

Ahead of the ECB rate decision, we have seen German CPI come in slightly weaker than expected, even if the rate has climbed to a 3-month high of 2.4%. The Eurozone CPI was hotter-than-expected, as mentioned, rising to 2.6% on the headline front and 2.9% on the core front. In the meantime, some of the recent Eurozone data releases have been stronger, for example the latest PMIs especially in the services sector. But alarmingly, negotiated wages in Q1 rose 4.7% year-over-year, compared to an expected drop to 4.0% from 4.5% in Q4. This is inflationary. The improving macro data and high wages presents a major dilemma for the ECB ahead of its rate decision. However, a 25-bps rate cut may go ahead anyway given that the ECB has built it up so much. If the ECB then decides not to pre-commit to further loosening this year, then that’s something that would probably more than outweigh the rate decision itself. It is becoming increasingly difficult to justify shorting the euro, for traders.

US NFP report is the next big US data release

Next week, we will have plenty of US macro data to look forward to, including the latest ISM PMI surveys from the manufacturing and services sectors, as well as JOLTS Job Openings, ADP private payrolls and jobless claims data. But the key highlight is on Friday, June 7, when the May jobs report is published.

The Fed has indicated it is willing to wait until the summer ends before potentially cutting interest rates. This jobs report and wages data should provide further clues on that front. In recent weeks, we have seen bond yields rise, with investors growing increasingly worried about the possibility of interest rates staying elevated for a longer period. If that sentiment changes, say because of a run of below-forecast US data, then the US dollar may finally break down more decisively and start a clean trend.  However, if data remains super-hot, then this may, paradoxically, weigh on risk sentiment as rate cut expectations are pushed further out.

EUR/USD outlook: Technical analysis

Source: TradingView.com

Ahead of the upcoming core PCE index, and next week’s key macro highlights, the EUR/USD has built modest bullish momentum, even if it remains stuck in a consolidation range. So far, it has been unable to decisively climb above April's high of 1.0885. Meanwhile, support around the 1.0785 – 1.0800 area continues to hold on the downside.

The underlying trend appears modestly bullish after breaking the bearish trend line established since December. The bulls will remain confident as long as the key support around the 1.0800 level is maintained.

In the short term, resistance lies at 1.0885-95, which has held after being tested earlier this week. This is the same area where EUR/USD peaked in April and faced resistance in recent weeks. A decisive breakout above this level could pave the way for a potential rise toward the March high of 1.0981 and eventually the 1.10 level.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R