EUR/USD Catches its Breath at Multi-Month Highs, Where to Next?

EUR/USD price prediction:

Read more: USD/CAD Forecast: 1.3000 bacon as Dollar Index (DXY) continues to slide

The EUR/USD pair has been on a tear since the release of the US CPI this week, reaching multi-month highs around 1.1245. The move was largely facilitated by dollar weakness as the Dollar Index (DXY) broke below the psychological 100.00 level for the first time since April 2022. The index is on track to its worst week since November 2022.

The compensatory narrative takes the dollar

It appears that the inflation-low narrative has taken hold of the dollar given the sell-off over the past few days. The FOMC meeting takes place on July 26, with the Fed currently suffering from power outages and no significant data on the agenda ahead of the meeting, the dollar could face more selling pressure. Looking at the CME FedWatch tool below, we can see that market participants are still chasing a 25bps rally in the July meeting.

Source: CME FedWatch

Personally, I expect the Fed to continue its walking cycle on July 26th with any surprise likely to be of the magnitude of the mentioned rally. Fed Chair Powell stated in congressional testimony that as the Fed approaches its target, pauses and a potential slowdown in the size of increases may be needed. Market participants seem to believe that the Fed will not hike until after the July meeting while the dollar is likely to be very sensitive to lackluster data from the US. Any signs of a slowdown in the US economy could be interpreted by market participants as a sign that the Fed may be able to cut interest rates sooner than expected which could add pressure on the dollar.

Talk has now turned to a possible “soft landing”, a word that has long infuriated market participants. Interesting times ahead for the US dollar and of course the markets as a whole as we head into the FOMC meeting in July and beyond.

upcoming dangerous events

Today we have the Preliminary Consumer Confidence report out of Michigan which could fuel some volatility around the greenback. Looking ahead to next week, we only have US Retail Sales and Preliminary Building Permits data on the agenda, neither of which will change the USD outlook for the time being. It appears that the Dollar Index may be in for a bumpy ride ahead of the FOMC meeting.

For all the economic data and events that move the market, see DailyFX calendar

Technical outlook and final thoughts

Looking at the EURUSD from a technical perspective, we are trading at the same levels as February 2022, as the greenback has started a small bounce today, up around 0.20% at the time of writing. We have seen a slight pullback from the highs in EURUSD heading into the US session.

The RSI is overbought, hinting at a potential bounce with 1.1200 likely to be the key. The closing of the daily and weekly candlesticks will be of particular importance as a close above 1.1200 might encourage the bulls as the new week begins. The weekly moving averages are setting up for a golden cross pattern as well which does not bode well for a potential bounce. Techies are flashing some mixed signals, but the old adage “the trend is your friend” has never been more true. Trying to pick a top at this point is a rather foolish endeavor with smart play as a hold back to allow potential bulls a chance to get involved.

EUR/USD Daily chart – July 14, 2023

Source: TradingView

Key levels to watch out for

Support levels

resistance levels

Customer Sense Data IG

IGCS shows that retail traders are currently short on EURUSD, with 76% of traders currently holding short positions. At DailyFX, we usually take a contrarian view of crowd sentiment, and the fact that traders are short suggests that EURUSD could enjoy a brief pullback before continuing higher towards the 1.1400 handle.

Written by: Zain Fouda, market writer for DailyFX.com

Connect with Zain and follow her on Twitter: @employee