- The US Dollar tumbled after US inflation data, DXY drops to lowest since April 2022.
- The EUR/USD broke key resistance levels and is now looking at the next one.
- Despite overbought warnings, the pair has more upside potential.
The EUR/USD rose for the fifth consecutive day, accelerating to the upside and boosted by a sell-off of the US Dollar. The pair broke key levels and posted its highest daily close since March 2022. The outlook favors further gains; however, incoming US data could potentially slow down the rally, or trigger corrections.
A sharp decline of the US Dollar led the EUR/USD to monthly highs. The Greenback tumbled after the release of US inflation data. The Consumer Price Index rose by 0.2% in June, which was below the market consensus of 0.3%. The annual rate dropped to 3%, the lowest since March 2021. The Core rate also slowed more than expected, dropping to 4.8% from 5.3%. Market participants still see the Federal Reserve raising rates in July. However, the numbers renewed optimism as it supported the perspective that it could be the last hike.
Treasury yields dropped and stocks rallied on Wall Street. The positive risk sentiment weakened the US Dollar further. On Thursday, the US Producer Price Index is due. The report could add to evidence of softer inflation or, on the contrary, point to stickiness.
On Thursday, the European Commission will release its economic forecast and Industrial Production data for May. Additionally, there is a meeting of the Eurogroup, and the European Central Bank (ECB) will release the minutes of its latest meeting.
Volatility will likely remain elevated over the next session, considering recent price action, as well as markets repricing Fed and ECB expectations. The pair is vulnerable either to further gains or to significant corrections.
EUR/USD short-term technical outlook
The EUR/USD surged more than a hundred pips on Wednesday and, so far, is up by 300 pips from last week's level. Such a rally could warrant some consolidation or a correction; however, so far, no signs of the rally stalling are seen and risks remain tilted to the upside. The momentum remains positive, and more gains seem likely. The next resistance levels are seen at 1.1160 and 1.1185.
The daily close above 1.1100 is the highest since March 2022 and suggests further gains ahead over the medium term. If the pair retraces, immediate support stands at 1.1095 and below at 1.1010. A slide under 1.1000 would negate the positive momentum, pointing to a consolidation or a deeper correction.
On the 4-hour chart, the EUR/USD is overbought, although it continues to look for a comfortable zone. Sooner or later, the rally will stall, but it is not clear if the Euro has reached that point yet.
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