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The euro against the dollar (EUR/USD) found an opportunity to move higher following investor reaction to the minutes of the latest federal Reserve meeting. It extended gains to reach the 1.0816 resistance level, the highest in three weeks, before settling around 1.0785 at the start of trading on Thursday. For its part, the US Federal Reserve left the target range for federal funds unchanged at 5.25%-5.50% for the seventh straight meeting in June 2024, in line with expectations.
US policymakers do not expect it to be appropriate to lower interest rates before they gain more confidence that inflation is moving sustainably towards 2%. Meanwhile, the dot chart showed that policymakers see only one rate cut this year and four cuts in 2025. In March, the Fed was looking at three cuts in 2024 and three in 2025.
On the stock trading platforms, the Stoxx 50 index of European shares rose 1 percent and the Stoxx 600 index rose 0.6 percent, recovering from the previous session's losses, as investor sentiment improved amid expectations that the Federal Reserve will cut US interest rates this year. Yesterday, Fed Chairman Powell said at the European Central Bank Forum that prices are now showing signs of resuming their disinflationary trend and that much progress has been made on inflation. However, in Europe, European Central Bank President Lagarde tempered expectations of further rate cuts in Europe, saying the central bank needs more time to assess inflation and economic trends.
Indeed, preliminary estimates for June showed that services inflation remained high, and the core rate failed to slow, while headline inflation eased. Meanwhile, eurozone producer prices fell slightly more than expected in May and final PMIs confirmed a slowdown in both services and private sector activity.
On the corporate front, Deutsche Bank (-3.3%), Société Générale (-2.7%), BNP Paribas (-2.6%) and Airbus (-2.4%) were the best performers.
On the economic data memo front, eurozone producer prices fell by 0.2% on a monthly basis in May 2024, after a 1% decline in April and compared to expectations of a 0.1% decline. The reading represents the seventh straight month of producer price contraction, although the smallest in the series, driven by a 1.1% decline in energy costs (vs -3.6% in April) and a 0.1% decline in durable goods (vs 0.2%). Moreover, Intermediate goods prices (0.1% vs 0.3%), capital goods (0.1% vs 0.2%) and non-durable goods (0.1% vs 0.2%) also rose.
On an annual basis, producer prices fell by 4.2%, below the 5.7% decline and compared to expectations of -4.1%. Excluding energy, the producer price index rose by 0.1%, below 0.3% in April and fell by 0.4% on an annual basis (vs -0.9%).
Elsewhere, the eurozone composite PMI was revised slightly higher. The euro area HCOB composite PMI was revised slightly down to 50.9 in June 2024 from a preliminary reading of 50.8, compared to 52.2 in May. The reading points to continued growth in the private sector, although expansion slowed to a three-month low. Services slowed (52.8 vs. 53.2) while manufacturing contracted at a faster pace (45.8 vs. 47.3). Furthermore, the uptick in activity levels was capped by softer demand, with new orders falling for the first time since February. Weaker sales performance was particularly marked in non-domestic markets, including intra-euro area trade. Meanwhile, job creation was the weakest in five months, and there was also an easing in price pressures, with the rates of increase in input costs and output prices falling to their lowest levels in five and eight months, respectively. Finally, the outlook for services production next year was upbeat, although the overall level of positivity towards the outlook fell to its lowest since early 2024.
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EUR/USD Technical analysis and forecast:
EUR/USD traded inside a descending triangle before rising to suggest that a rally as high as the chart pattern is imminent. The price has pulled back to the previous resistance level, which now appears to be holding as support. The Fibonacci extension tool shows the next upside targets, with the pair already testing the 38.2% extension at the 1.0750 minor psychological mark.
Technically, the stronger upside momentum could take it to the 50% level at 1.0762 or the 61.8% Fibonacci level which aligns with the swing high at 1.0775. Furthermore, the 76.4% level is at 1.0790 and then the full extension at 1.0815. Overall, the 100 SMA has just crossed above the 200 SMA to confirm that the upside is likely to gain strength rather than retreat. Also, the moving averages are aligned with the broken triangle top to add strength as support. However, the Stochastic indicator is heading lower from the overbought zone to indicate exhaustion among buyers and a possible return of selling pressure. Likewise, the oscillator has plenty of room to slide before reflecting exhaustion among sellers. On the other hand, the RSI still has room to rise before reaching the overbought zone to indicate exhaustion among buyers, so the rally could continue.
Later this week, the US Non-Farm Payrolls report is due to be released and is set to show weak employment for June. If this is the case, the US dollar could weaken further as traders renew calls for more Fed easing. Ultimately, weakness in fundamental data such as Labor force participation and average hourly earnings could also weigh on the US dollar.
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