EurUsd weekly outlook for July 3, 2023 – the Fed & the ECB Show a Stern Face

  • The financial landscape is still in flux. Interest rates in the United States may not have reached their zenith just yet. Beyond the real estate market, indications of an economic downturn are emerging slowly, causing inflation expectations to remain stubbornly high. Thus, a strategy to dampen demand may be necessary to temper this.
  • Echoing this sentiment in Sintra, Lagarde confirmed that the mission is still underway and consequently, interest rates will continue to ascend in July and beyond. This is positive news for the euro, but presents challenges for the wider economy, which is faced with a sharper than anticipated deceleration, a fact underscored by the decline in the German IFO.
  • The EurUsd exchange rate attempts to breach the 1.10 level but so far, these efforts have not been fruitful. The future course of the exchange rate will be guided by the 1.07-1.10 range, depending on which direction prices break out over the coming weeks.

Recession is a Necessary Sacrifice

The German IFO index recorded another decrease in June, marking the third consecutive drop and underscoring the continued strain on the German economy. This trend raises serious questions about the likelihood of an even more assertive European Central Bank than previously witnessed. Other key indicators, such as the services Purchasing Managers’ Index (PMI), exhibit nearly identical figures for the US and Euroland. However, the manufacturing sector shows a more noticeable weakness in Europe, adding to concerns about the single currency’s capacity to surmount the imminent short-term resistance.

Despite these concerns, Lagarde affirmed that efforts to raise interest rates have not concluded, as inflation is yet to be fully reined in. On July 27, rates are set to increase by another 25 basis points, in spite of the Italian government’s lackluster objections. This move bolsters both the euro and interest rates, with the spread between peripherals and Bunds remaining relatively stable.

Concurrently, discussions are beginning in the United States around potential new measures by the Federal Reserve. Bloomberg’s World Interest Rate Probability (WIRP), which forecasts the Fed Funds in future meetings, predicts a possible 50 basis point rise by the year’s end. Powell, in Sintra, validated that the rate hikes could occur multiple times, causing the EurUsd to pause.

Nevertheless, the American economy remains resilient, with orders for durable goods experiencing a 1.7% rise, countering an anticipated -0.9% drop. Consumer confidence also exceeded expectations and notably surpassed the May data.

Technical Analysis – The Struggle Between Support and Resistance Levels Intensifies

The trajectory of the EurUsd exchange rate is progressively mirroring patterns observed during 2017-2018 and 2020-2021. The Price Oscillator, or the percentage spread between the spot price and the 200-day moving average, has risen above 5% twice in the course of 2023, precisely echoing the previous years. The prices and oscillators began to diverge, creating a kind of plateau in prices, which in previous cases was slightly above 1.20. This time, it could be slightly above 1.10. We’ve known for a while that the most significant hurdle for EurUsd lies between 1.105 and 1.13. A breakthrough upwards would definitively open the door towards 1.18/1.20. At that point, this would offer a favorable opportunity for European investors to increase their exposure to the dollar, especially given the historical positioning of the Price Oscillator returning to extreme territory.

EurUsd (daily chart) – Drawing Parallels with the Past to Identify the Top

Returning to the monthly chart, we aim to better understand the dynamics that might be triggered should EurUsd recover (and surpass) the resistance area between 1.10 and 1.13. This would imply a return above the uptrend line, which aligns with the old “neckline” of the bearish head and shoulders pattern, as well as the negation of the bearish engulfing pattern observed in May. All these signals would negate previous indications and reposition the course of EurUsd towards 1.18/1.20. At this point, the entire game would take on a distinctly different, more challenging flavor.

EurUsd (monthly chart) – an ongoing battle between bears and bulls.






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