By Samir Al Khoury,

It seems that the downward path for the EUR/USD is prevailing in the next stage for several reasons, the most prominent of which are:

-European Central Bank’s Monetary Policy: The ECB shifted from tight to accommodative, reducing interest rates by 25 basis points for the first time since March 2016, from 4.50% to 4.25%.

-Political Uncertainty in Europe: Far-right parties have strengthened their positions in the European elections, and French President Emmanuel Macron dissolved the French Parliament, calling for early legislative elections on June 30 of this year.

-Strength of the US Dollar: Recent US economic data exceeded analysts’ expectations, especially labor market data. The NFP employment report recorded 272,000 new jobs, surpassing expectations (182K) and the previous reading (165K). Additionally, the average hourly wages index on an annual basis recorded 4.1%, higher than expectations (3.9%) and the previous reading (4.0%).

-Market Bets on US Interest Rates: There has been a reduction in market bets on US interest rate cuts. The possibility of an interest rate cut is currently priced once this year, down from about six or seven times at the beginning of the year.

The continued difference between German and US government bond yields puts pressure on the euro against the dollar. For example, the two-year German government bond yield is approximately 3.08%, while the two-year US Treasury bond yield is approximately 4.88%, creating a gap of approximately 1.80%, which encourages interest trading or carry trade.

Market Expectations for This Week

The markets are awaiting several key indicators this week:

-Consumer Price Index (CPI): Both the headline and core CPI will be released tomorrow, Wednesday. The headline CPI is expected to stabilize at 3.4%, identical to the April reading. The core CPI, which excludes food and energy, is expected to record 3.5%, slightly lower than the April reading of 3.6%.

-Producer Price Index (PPI): The PPI will be released on Thursday, with expectations of it stabilizing at 2.2%, identical to April’s reading.

Any reading higher than expectations for the CPI and PPI could positively reflect on the US dollar against all major currencies and negatively impact stocks, bonds, and commodities, especially gold, due to the inverse relationship between the dollar and other financial instruments.

-Federal Reserve Interest Rate Decision: The Federal Reserve’s interest rate decision is also anticipated tomorrow, Wednesday. Expectations are that interest rates will remain unchanged at 5.25% and 5.50%. Attention will be on the dot plot, updated estimates of the Monetary Policy Committee members regarding the path of interest rates, growth, and inflation, as well as Federal Chairman Jerome Powell’s speech and tone concerning the interest path during the coming period, particularly the timing of the first rate cut.

Technical Analysis of EUR/USD

The price of the euro against the dollar is hovering around the 1.0750 levels, and the technical picture seems discouraging. For instance:

• The EUR/USD pair broke basic support levels, such as the 200-day moving average (1.0786) and the 50-day moving average (1.0779), indicating a dominant downward trend in the next stage.

• The biggest challenge lies in reaching the 1.0600 level, recorded on April 16, 2024.

• The Relative Strength Index (RSI) is at 43 points, indicating negative momentum for the EUR/USD pair.

Please note that this analysis is provided for informational purposes only and should not be considered as investment advice.

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