EUR/USD Weekly Forecast: Delta and Fed-driven dollar strength set to sink the pair

• EUR/USD has succumbed to Fed-led dollar strength. 
• The Fed's meeting minutes, eurozone business surveys stand out.
• Early July's daily chart is showing bulls are in the lead.
• The FX Poll is pointing to a fall under 1.18 before a robust recovery.

Dollar domination and several dead-cat bounces – that is how the week bridging the first half and the second half of 2021 can be summarized. Updates from central banks, several data points and growing virus worries are set to determine trading in the upcoming week. 

This week in EUR/USD: NFP delivers action

Saved by Nonfarm Payrolls: The all-important release seems to have had one role in markets – triggering a downward dollar correction. For a change, the US gained more jobs than expected, 850,000. However, moderate wage growth at 3.6% and the lack of substantial upward revisions were enough to trigger an upward move.

NFP Quick Analysis: Buy the dollar dip? Healthy jobs growth to keep Fed on tapering track

The timing, ahead of a long weekend, also added to traders' urge to close positions. Nevertheless, EUR/USD is still down on the week.

New hawk in town: Federal Reserve Governor Christopher Waller has reinforced those calling to decrease monetary policy support in response to the economic recovery. While Richmond Fed President Thomas Barkin provided the dovish counterbalance, it seems that the hawkish camp is growing larger. That implies a higher chance that the bank reduced its bond-buying scheme sooner rather than later. Overall, Waller provided some support to the dollar. 

Delta dark clouds: After spreading rapidly through Britain, it seems that the Delta coronavirus variant is making its way through Europe and threatening to inflict economic damage. While the old continent is vaccinating its population rapidly, the quick contagion has been causing an uptick in cases weighing on the euro. 

Infections have stopped falling in some European countries:

Source: FT

Another drag on the common currency came from eurozone inflation figures. The headline Consumer Price Index dropped to 1.9% YoY, while Core CPI slid to 0.9%. That is a stark difference with 3.4% in the US, according to the Fed's preferred gauge of underlying prices.

US President Joe Biden has yet to translate his bipartisan agreement on infrastructure spending into legislation. The topic drifted away from the spotlight. 

Eurozone events: EZ surveys and Delta variant eyed

The Delta variant of coronavirus has already delayed Britain's reopening and may derail Europeans' summer vacations. The UK also opted to accelerate its vaccination process, and apart from watching the number of infections, investors will eye shots in arms. 

While the old continent has substantially caught up, it lags behind its developed-world peers on the vaccination front. Moreover, it is unclear if the elevated doses delivered to Europe will continue in July at the same pace as June. These charts may impact the euro. 

Source: FT

The economic calendar kicks off with final Services PMIs, which will likely continue showing an upbeat sentiment about the recovery. Another business survey is eyed on Tuesday – the German ZEW Business Climate figure. Retail sales data for May is set to show a rapid recovery, especially compared to the same month in 2020.

Markets will likely await an upgrade from economic growth forecasts from the European Commission. America's stimulus and Europe's reopening have probably outweighed the more recent variant worries. 

The biggest known unknown on the economic calendar is the European Central Bank's special strategy meeting set to conclude on Thursday. Will the Frankfurt-based institution allow for higher inflation like the Fed? Will it move to focus on Core CPI?

Such moves could weigh on the euro. Former ECB President Mario Draghi – now Prime Minister of Italy – has recently expressed his support for looser monetary policy – and he may still have influence. However, if the bank refrains from making any changes to lack of consensus, the common currency would have more breathing room.  

Here are the events lined up in the Eurozone on the forex calendar:

US events: Fed minutes and ISM survey in focus

President Biden aimed to reach 70% of adults with one dose by Independence Day – July 4. However, it has already become clear that the target will be missed. While coronavirus cases continue falling in America, there is always a fear of the Delta variant. Inoculating more people is critical to keep the economy running, yet the immunization campaign has substantially slowed.

An uptick in this chart, breaking the downtrend, would be positive for markets and the dollar. 

Source: New York Times

Drafting the infrastructure bill is set to resume in Washington, yet the chances for an urgent rush to pass legislation remain low. 

Echoes from Friday's Nonfarm Payrolls will likely move markets early in the week while Americans enjoy their long weekend. Additional analysis could sway investors to change their positions. On Tuesday, the stage belongs to the ISM Services PMI statistics for June, set to soften from the elevated level of 64 recorded in May. 

While the employment component in ISM's report is somewhat stale after the NFP, the Prices Paid figure is relevant to the Fed's assessment of inflation expectations.

The central bank is in focus on Wednesday, with the publication of its meeting minutes from June. That event marked an inflection point for the dollar, as the Fed shocked markets with a hawkish shift. The dot plot signaled two interest rate hikes in 2023, and Chair Jerome Powell went further by saying that the debate about tapering bond-buying is kicking off. 

Will the minutes counter that hawkishness with some nuance? That could weigh on the greenback. Conversely, the protocols could also show that those calling to scale back support for the economy were louder than perceived in June. In such a case, the greenback could gain ground. 

Here are the scheduled events in the US:

EUR/USD technical analysis

Euro/dollar is nearing oversold conditions as the Relative Strength Index (RSI) on the daily chart is showing. If the RSI dips below 30, the pair could correct upward. Other indicators as momentum and the 50-day, 100-day and 200-day Simple Moving Averages all point to a downtrend in the bigger scheme of things. 

Support awaits at the early July low of 1.1835, followed by 1.1760, a cushion back in late March. The round 1.17 level – EUR/USD launch point in 1999 – is the next line to watch. 

Resistance is at 1.1910, a support line from late June. It is followed by 1.1970, the post-Fed crash recovery peak. A stubborn cap awaits at 1.20, which is not only a psychological barrier but also a support line from May and where the 200-day SMA hits the price.

EUR/USD sentiment

The Fed's minutes may serve as a reminder of the bank's hawkish twist, which could counter a dovish shift from the ECB. The spread of the Delta variant across Europe could also weigh on the euro. Overall, there is room for more falls. 

The FXStreet Poll is pointing to an imminent dip below 1.18 – an extension of the past weeks' decline, before a robust recovery later on. Are experts expecting the Fed's meeting minutes to revive dollar strength? 

Related Reads

• Five factors moving the US dollar in 2021 and not necessarily to the downside.
• GBP/USD Weekly Forecast: Approaching critical support, Fed minutes and Delta could down cable