EUR/USD Forecast: Seven reasons to favor a rally, and technicals are bullish as well

Shining light at the end of the tunnel? The euro has been benefiting from a series of positive news coming out of the old continent – and by investors shrugging off concerns about Sino-American relations. 

Here seven reasons to favor further gains, four related to euro strength and three to dollar weakness. Moreover, technicals are also pointing to the upside. 

1) Encouraging COVID-19 statistics: German coronavirus cases have risen by only 0.2% and the Reproductive indicator (R) remains depressed at 0.83. That is well below 1, which means every coronavirus carrier infects another person. Italy – the hardest-hit country – recorded its lowest number of deaths since March, while daily mortalities in Spain have completed a week under the 100 mark. 

2) European reopening: All three countries have continued reopening the economies and are moving to reopen borders as well. Germany is set to remove travel warnings in mid-June and Spain will lift the requirement for visitors to self-isolate from July 1. The German IFO Business Climate bounced to 79.5 points in May, beating expectations, with some cautious optimism noted by the institute. 

3) Optimism about the ECB: Investors are also content with the European Central Bank's bond-buying scheme. François Villeroy de Galhau, a member of the bank's Governing Council, described the latest program as a "masterpiece." The Pandemic Emergency Purchase Program (PEPP) stands at €750 billion and many expect the Frankfurt-based institution to expand it next week.

While the German constitutional court has frowned upon the ECB's bond-buying scheme, the funds support governments in their efforts to provide relief and accelerate the recovery.

4) Optimism about the EU fund: Last and not least, fractures are emerging in the "Frugal Four." Austria, one of the hawkish members of this club, is reportedly open to accepting some grants in the new EU recovery fund. Together with the Netherlands, Sweden, and Denmark, these countries opposed the Franco-Gramn plan for granting – not lending – money to the hardest-hit countries. The €500 billion strong program now seems to have higher chances of passing.

Safe-haven dollar downed

5) US-Chinese trade deal intact: Traders seem to fade ongoing Sino-American tensions. The world's largest economies remain at loggerheads over China's move to tighten its grip on Hong Kong. Beijing sees Washington's legislation to limit the listing of Chinese companies in the US – as well as curbs on Huawei – as hostile. 

Investors may see this "new cold war" as mild while both countries continue honoring the trade deal. However, it is essential to note that the mood may change.

6) US data to improve?: Volatility is set to increase as American traders return from their long weekend. Several housing figures are on the docket, including sales of new homes, yet perhaps the most significant release is the Conference Board's Consumer Confidence measure. It is expected to bounce from April's lows.

See: CB Consumer Confidence Preview: Can that be the turn? Behind us?

7) Vaccine hopes: The safe-haven greenback is also downed by hopes for a new COVID-19 vaccine. Novavax, an Ameican pharma firm, will start a human trial in Australia, with results due out in July. It is following the footsteps of Moderna, which announced progress, yet enthusiasm fizzled when scientists were frustrated by the lack of details. Will this happen with Novavax as well? 

All in all, the euro has reasons to rise while the dollar has no upside driver, yet things may always change.

EUR/USD Technical Analysis

Euro/dollar has bounced off the critical support line at 1.0870 discussed on Monday and has also recaptured the 50 Simple Moving Average on the four-hour chart, a bullish sign. While momentum is still to the downside, the success in rising above the uptrend support line provides a tailwind for the common currency. 

Some resistance awaits at the daily high of 1.0940, which was also a swing high on in early May. It is followed by 1.0970, a swing high from last week, and then by 1.10, a psychologically significant figure.

Support is at 1.0895, a swing high from mid-May, followed by 1.0870 mentioned earlier and then by 1.0820 and 1.0780. 

See: Negative Rates: Only good for downing currencies?