The EUR/USD continued its strong rally last week as traders reflected on the weak US inflation data. It jumped to a high of 1.0900, its highest swing since March 21st asthe focus now shifts to the upcoming ECB decision.
Federal Reserve rate cut hopes
The US dollar index crashed to $104 last week and now sits at its lowest point since April 9th. It has dropped by more than 2% from its highest point in May.
This decline happened after the US published relatively weak economic numbers this month, raising the possibility of Federal Reserve cuts.
Two reports by the Institute of Supply Management (ISM) showed that the manufacturing and non-manufacturing PMI dropped below 50 in June. A PMI figure of less than 50 sends a sign that a sector is contracting.
Another report showed that the labor market is softening. While the economy added over 200k jobs in June, the unemployment rate rose to 4.1%, its highest point in months. The rate has been in an uptrend after bottoming at 3.5% in July last year.
Meanwhile, a report by the Bureau of Labor Statistics (BLS) showed that the country’s inflation is moving in the right direction. The headline Consumer Price Index (CPI) dropped to 3.0% in June while the core CPI moved to 3.3%.
These numbers raised the probability that the Fed will start to cut interest rates in its September meeting. The Fed will likely provide these hints in the upcoming meeting followed by August’s Jackson Hole Symposium.
Before the September meeting, the Fed will have received important jobs and inflation numbers from the US. This week, the US will publish the latest retail sales numbers, which will provide more information about the state of the consumer.
However, the Fed may still decide to start cutting rates in December because of the November general election. It could be accused of political interference if it starts to cut in September since cuts tend to boost an economy.
European Central Bank decision ahead
The next important catalyst for the EUR/USD pair will be the upcoming European Central Bank decision scheduled for Thursday.
This will be an important decision even though analysts expect that the bank will leave interest rates unchanged at 4.25%. It will also leave the deposit facility rate at 3.75%.
Before the rate decision, the Eurostat will publish the final estimate of June’s inflation report. Based on the recent estimate, analysts expect the data will show that the headline Consumer Price Index (CPI) remained at 2.5% in June while the core CPI remained at 2.9%.
Therefore, the ECB will likely want more time to confirm that the country’s inflation is moving in the right direction. In a note, analysts at ING said:
“The ECB does seem more confident in its future inflation forecasts. We reckon a September rate cut remains on track, but don’t expect team captain Christine to tell us much more about that next week.”
EUR/USD technical analysis
The EUR/USD forex exchange rate has bounced back in the past few days. This recovery started after the pair tested the key support at 1.0700, which coincided with the ascending trendline that connects the lowest swings since October last year.
The pair now sits at an important level since it was its highest swing on June 5th. It was also the neckline of the inverse head and shoulders pattern shown in red.
It has moved above the 50-day moving average and the 23.6% Fibonacci Retracement point level. Oscillators like the Relative Strength Index (RSI) and the MACD have all pointed upwards.
Therefore, the pair will likely continue rising ahead of the ECB decision. If this happens, the next key level to watch will be at 1.100.
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