EUR/USD: Longer-term uptrend likely, but flash CPI could trigger a pullback

Macroeconomic snapshot

The macroeconomics situation of the Euro Area (EA) is mostly indifferent but is likely to improve. This is expected to reduce downward pressure on the Euro’s value.

June meeting of the European Central Banks, governing council

The Main Refinancing Operations rate was hiked by 0.25% in June to 4.00%, matching the 0.25% hike in May

The next meeting is on Thursday the 27th of July

The hiking cycle has risen as anticipated although is not expected to rise much further. This is likely to lead to stabilised bond yields which may limit their appeal to investors. This is expected to apply indifferent support/pressure on the Euro’s value.

GDP growth rate third estimate for Q1 2023

GDP in the EA for Q1 slowed to a 0.1% quarterly contraction from 0.0% in Q4 2022

The flash Q2 report is due on Monday the 31st of July

The economy has contracted against anticipations but is expected to grow again. This is likely to lead to increased stock market prices and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply upward support on the Euro’s value.

CPI final for May

CPI in the EA for May slowed a lot to 6.1% annual inflation from 7.0% in April

The flash June report is due on Friday the 30th of June

CPI has fallen faster than anticipated and is expected to fall much further. This is likely to lead to lower interest rates and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply downward pressure on the Euro’s value.

Labour report for April

Unemployment in the EA for April fell slightly to 6.5% from 6.6% in March

The May report is due on Friday the 30th of June

The labour market has improved slightly better than anticipated but is expected to deteriorate. This is likely to lead to reduced growth and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply downward pressure on the Euro’s value.

Russian-EU gas dispute

The Russia-EU gas dispute has caused an increase in the cost of energy which has reduced the spending power of consumers and resulted in slower economic growth. This is likely to lead to reduced foreign investment in the stock market and is expected to apply downward pressure on the Euro’s value.

Russian invasion of Ukraine

The war is having a detrimental effect on the global and EA economy by causing higher energy prices, supply chain disruptions, financial market volatility, refugee crisis and geopolitical uncertainty

EUR/USD (four weeks)

The EUR/USD has risen in the past four weeks, supported by central bank disparity. The Fed's hiking cycle is ending, weakening the dollar, while high inflation in the EA has warranted a more aggressive ECB.

EUR/USD longer term (four months)

The EUR/USD has formed a downtrend since the start of May when safe-haven flows strengthened the dollar as the US ran the risk of default due to the debt ceiling not being extended. This crisis was resolved at the end of May and the pair began a retracement which is now looking to test the 78.60% Fib. A move beyond the trend start at 1.108 will form an uptrend.

EUR/USD outlook

The events to keep an eye on:

• Tuesday the 27th of June

ECB President Legarde speaks “inflation is still too high”.

US CB Consumer Confidence Big beat at 109.7 vs 103.9 exp. and prev. 102.5.

• Wednesday the 28th of June

ECB President Legarde speaks ECB Forum on Central Banking, in Sintra.

Fed Chair Powell speaks ECB Forum on Central Banking, in Sintra.

FOMC Member Goolsbee Speaks historically dovish regarding rates.

• Thursday the 29th of June

DE Prelim CPI m/m Improvement exp. at 0.2% vs. prev. -0.1%.

Fed Chair Powell speaks Fourth Conference on Financial Stability hosted by the Bank of Spain.

US GDP Q1 final Slight upward revision to 1.4% exp. from prev. 1.3%.

• Friday the 30th of June.

EA Flash CPI Big improvement exp. at 5.6% from 6.1%.

CME group 30-day Fed fund futures

• July: steady sentiment of a 0.25% hike, 75% in favour (prev. 75%).

• September: holding sentiment of a hold, 70% in favour (20% for a 0.25% cut - prev. 15%).

Value of the EUR/USD to remain above 1.07 unless EA Flash CPI falls further than expected on Friday: The four week moves have been rising from 1.07 to 1.10. Events this week are favoured towards a stronger Euro as ECB Lagarde speeches are expected to be hawkish. However, there is a risk for a weaker Euro on Friday if the flash CPI comes in lower than expected as this would warrant a lower peak ECB Main Refinancing Rate.

Longer Term Value of the EUR/USD to remain above 1.06, uptrend formed on moves beyond 1.108: The four month moves have been falling 1.108 to 1.060 although has retraced to test 1.10. The macroeconomic situation suggests the downtrend is unlikely to extend which would indicate moves beyond 1.108 are eventually possible to form an uptrend.