EUR/USD OUTLOOK:
- Market attention will center on U.S. inflation data, the Fed’s announcement and the ECB’s interest rate decision next week
- While the Fed is expected to hold rates steady, a hawkish surprise should not be ruled out. The ECB, for its part, is seen raising borrowing costs by 25 bp, but its guidance may be dovish
- EUR/USD’s balance of risks appears to be tilted to the downside in the short term
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Currency traders will be fixated on three high-impact events next week: the May U.S. inflation report on Tuesday and the June FOMC decision on Wednesday and the European Central Bank’s monetary policy announcement on Thursday. These important catalysts are likely to set the trading tone for EUR/USD in financial markets, helping to guide the exchange rate near-term trajectory.
KEY HIGH-IMPACT EVENTS NEXT WEEK
Source: DailyFX Economic Calendar
US INFLATION DATA
U.S. inflation is expected to continue its downward trend, but the directional improvement may be limited, especially in the underlying metric. This may be a sign that the Federal Reserve may need to do more to restore price stability.
In terms of market estimates, May annual headline CPI is seen easing to 4.1% from 4.9% previously, while the core indicator, which excludes food and energy items, is forecast to have cooled to 5.2% from 5.5%. The higher the numbers, the better for the U.S. dollar and the worse for risk assets.
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FED DECISION
In recent weeks, the Federal Reserve has adopted a more cautious tone and has signaled that it may hold rates steady in June to better assess the lagged effects of cumulative tightening on the economy. For this reason, investors expect no action in terms of monetary policy next week,
Despite market pricing, traders should not entirely rule out the possibility of another 25 basis-points hike, as other central banks are starting to get aggressive again. The Bank of Canada, for instance, resumed lifting borrowing costs this past week after staying pat for two months, acknowledging that its posture is not restrictive enough to restore price stability.
Given the resilience of the U.S. economy, a premature pause could be a serious mistake for the Fed. For example, if the hiatus allowed inflation to regain strength and become more entrenched, policymakers may need to come back off the sidelines quickly and return to larger and non-standard hikes, an unnecessary and avoidable risk at this moment.
Playing devil’s advocate, if the FOMC opts to hit the pause button to avoid surprising traders, the decision will not necessarily be bearish for the U.S. dollar, as it could come accompanied by a more hawkish policy outlook, with the dot-plot possibly incorporating two additional 25 bp hikes for 2023 and no cuts through 2024 in this scenario. On net, higher rates for longer should be positive for the greenback.
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ECB DECISION
On the other side of the Atlantic, the European Central Bank is expected to deliver a quarter-point interest rate rise at its June meeting. This decision is fully discounted, so traders should focus on the underlying message and tone to determine the final destination for the terminal rate.
With inflation in the region easing and the German economy in tailspin, the ECB may err on the side of caution and avoid offering an aggressive assessment of the policy outlook. Markets could interpret this as a sign the tightening campaign is wrapping up, meaning one additional hike and that’s it.
The lack of hawkish guidance is likely to weigh on the euro, exposing EUR/USD to further short-term losses.
of clients are net long. of clients are net short.
| Change in | Longs | Shorts | OI |
| Daily | 2% | -4% | -1% |
| Weekly | -6% | 22% | 5% |
EUR/USD TECHNICAL ANALYSIS
EUR/USD has corrected sharply lower from its May highs. During this downturn, prices have dipped below an important trendline and briefly fallen to the lowest level in more than two months before staging a modest rebound and testing a technical barrier near 1.0750/1.0800.
While EUR/USD’s prospects have become less constructive lately, bulls may still be able to regain control of the market, but to do so they must push the exchange rate above confluence resistance at 1.0750/1.0800. If this bullish breakout materializes, we could see an advance toward the 1.0900 mark.
In contrast, if sellers manage to drive prices lower and take out support at 1.0640/1.0600, all bets are off. This breakdown could embolden bears to launch an attack on the psychological 1.0500 handle, where the 200-day simple moving average aligns with the 38.2% Fib retracement of the Sept 2022/May 2023 rally.
EUR/USD TECHNICAL CHART
EUR/USD Technical Chart Prepared Using TradingView