EUR/USD Breakout Gains Momentum but Fibonacci Resistance on Radar

EUR/USD Forecast:

• EUR/USD About 2.5% this week, up to its best level since February 2022
• A pessimistic repricing of interest rate expectations after the US came in lower than expected economic inflation The data may account for recent moves in the forex space
• Market dynamics and positive may favor euro Next week

Most read: Gold finds a spark in weak US inflation data, EUR/USD rises to a new 2023 peak

EUR/USD has rallied this past week, rising nearly 2.5% to its best level since February 2022 and posting its best weekly performance in almost eight months.

The strong rally in the EUR was mainly driven by broad-based weakness in the US dollar, following weaker-than-expected CPI and PPI data in the US. For context, both indicators surprised to the downside, suggesting that price pressures in the North American economy are decelerating faster than initially envisioned, an encouraging situation for the Fed.

Economic data last week

source: DailyFX Economic Calendar

Progress on the inflation front has repriced markets to lower the Fed’s rally path. Although the odds of a quarter-point rise at this month’s FOMC meeting remained virtually unchanged above 90%, traders dumped bets in favor of an additional 25 basis point adjustment in September. This means that the central bank may be about to end its tightening campaign soon.

A cautious reassessment of interest rate expectations has put strong downward pressure on US Treasury yields, especially at the front end of the curve. To add some color, the two-year note traded at a 16-year high, near 5.11%, last Thursday, but late this week it eased to 4.74% following recent developments.

Focusing on next week, it will be somewhat economic calendar. In the US, the only release of note will be the retail sales report for June on Tuesday. In the Eurozone, June CPI data could get some attention, but is unlikely to be a significant source of volatility, as it will be the second and final estimate, which generally includes a few revisions compared to the flash report.

Data provided for the United States and the European Union

source: DailyFX Economic Calendar

With no major events of high impact over the next several days and the Fed entering a lull ahead of its July 25-26 meeting, there are no significant catalysts that could cause the market to turn in favor of the US dollar. Against this backdrop, EUR/USD may extend its recent advance, but its upside potential may be limited given the pair’s overbought conditions in the forex space.

Technical analysis of the EUR/USD pair

The EUR/USD pair has been tearing up in recent days, breaking one technical resistance after another. On Friday, the pair managed to extend its advance, while maintaining the recent breakout to trade near 1.1237, which is the highest exchange rate since February 2022.

Looking ahead, if prices are able to hold above 1.1200, the sentiment around the Euro can improve further, reinforcing bullish appetite and paving the way for a move towards 1.1275, 61.8% Fibonacci retracement of the January 2021/September 2022 sell-off. Above this ceiling attention turns to 1.1375.

On the flip side, if the bullish momentum fades and gives way to a market reversal, the initial support is around the 1.1200 area. In a test case, price reaction around this key floor should be analyzed closely for near-term guidance, keeping in mind that a breakdown could offer 1.1115/1.1080, followed by 1.1010.

Technical chart of the EUR/USD pair

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