The Euro has staged a surprising comeback against the US Dollar in recent weeks, clawing back losses incurred earlier in the year. This resilience stems from a rosier economic outlook in the Eurozone compared to the US. Recent purchasing manager surveys indicate faster business activity growth in the Eurozone compared to the US for the first time in a year. This has helped the Euro recover roughly 1.7% from April’s lows to around $1.0708.
However, the Euro remains vulnerable to a few key factors. Firstly, US interest rates are still expected to remain higher than Eurozone rates throughout the year, potentially putting downward pressure on the Euro. Secondly, a significant spike in oil prices or a deterioration in geopolitical tensions could undermine the Eurozone’s growth prospects and reignite inflation concerns.
Markets currently anticipate three quarter-point rate cuts from the ECB by year-end, bringing the benchmark rate to around 3.25%. The Fed, on the other hand, is expected to cut rates only twice this year, leaving the gap between US and Eurozone rates at 175 basis points. Some analysts warn that if the market pushes out Fed rate cuts and the ECB maintains its easing stance, the Euro could slip back to parity with the Dollar, a scenario the ECB would likely try to avoid.
Technical Analysis
The 4-hour chart shows that the EURUSD is currently trading flat at 1.07882 within an ascending channel. The price action sits above all three Simple Moving Averages (SMAs), with the 20-SMA (green line) positioned above both the 50-SMA (blue line) and 100-SMA (orange line), indicating a bullish bias. The RSI (58.88) reinforces this sentiment, hovering comfortably above 50.
With the RSI firmly trading above the 50.00 level, continued appreciation would likely offer short-term trading opportunities towards the 1.08371 resistance level in the near term. A successful break above the 1.08371 level would likely bring the major resistance level of 1.08850 into play in the short term.
However, a sustained push below the SMAs could leave the 1.07242 support level as the initial level of interest in the near term. A break below the initial support level, with significant volume, could confirm the bearish momentum, likely bringing the 1.06782 support level into play.
Summary
The Euro has defied expectations by gaining ground against the USD on the back of a stronger Eurozone economy. However, the upcoming US inflation data remains a crucial factor. A bullish breakout above $1.0837 could see the Euro extend its gains. Conversely, a hotter-than-expected inflation report could trigger a reversal, pushing the EURUSD towards parity.
Sources: TradingView, Trading Economics, Reuters.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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