Bullish Breakout Signals Upward Price Trend Ahead for EUR/USD

EUR/USD Forecast:

• EUR/USD It rose to its best level since May 11 following the Fed and European Central Bank’s decision last week
• The Fed kept borrowing costs stable, but signaled a higher final interest rate. However, traders were skeptical about the US central bank’s plans to resume walking again
• Meanwhile, the European Central Bank raised interest rates and revised them upward economic inflation expectations, causing markets to price in further tightening for the coming months

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EUR/USD plunged in May, dropping below 1.0700 at the end of the month and reaching its weakest point since mid-March. However, the sell-off appears to have run its course, as the exchange rate has undergone a strong turnaround recently. In the past week alone, the pair rose 1.8% to 1.0940, marking its best level since May 11th, partially driven by broad USD weakness following the FOMC announcement.

At its June meeting, the Fed kept borrowing costs steady, but signaled 50 basis points for additional tightening through the end of the year and higher rates for longer. The aggressive policy roadmap was not enough to keep the greenback afloat as traders were skeptical of the central bank’s plans to resume rallying again, perhaps on fears of a potential recession.

Market expectations are unlikely to converge with Fed expectations unless incoming data confirms that the US economy remains in good shape. However, there are no major economic reports that can provide insight into the outlook in the coming days, so traders may remain dogged for the time being. This could prevent US Treasury yields from re-quoting higher, biasing the US dollar to the downside in the near term.

On the other side of the equation, sentiment surrounding the euro is starting to turn more positive again, particularly after the European Central Bank indicated that it was “highly likely” that it would make another hike next month and raise its core CPI forecasts for 2023, 2024 and 2025. Higher core inflation could translate into a more restrictive monetary policy stance over the outlook horizon, even if the central bank is not yet ready to endorse this view.

Overall, the stars seem to be lining up for more EUR strength in the very near term. Against this backdrop, it would not be surprising to see EUR/USD continue to rally and challenge 2023 highs soon.

Technical analysis of the EUR/USD pair

The outlook for the EUR/USD has turned more positive after the recent price action. However, the chart below shows two major bullish events that are worth highlighting: 1) the pair has regained the trend line that led it higher since September last year, and 2) the exchange rate has regained its 50-day simple moving average.

With bullish momentum on its side, EUR/USD could soon retest its May peak near 1.1090, but more gains could be in store on a push above this technical resistance, with the next bullish target located around the psychological level of 1.1200.

Conversely, if EUR/USD fails to sustain last week’s breach and falls below the support extended from 1.0915 to 1.0875, the sellers may regain the upper hand, paving the way for a decline towards 1.0790/1.0755. While prices may establish a base around these levels, a breakdown could lead to a drop towards the May lows.

Technical chart of the EUR/USD pair

EUR/USD technical chart created with TradingView