EUR/USD Daily Forecast – Euro Remains Vulnerable to a Further Correction

The rise in EUR/USD for July marked the largest monthly gain in more than a decade. The pair rose as incoming economic data showed the economy well on in its way to a recovery, after getting hit hard by the Coronavirus earlier in the year.

But European Central Bank chief economist Philip Lane cautioned earlier today that the economy will need to sustain the momentum. Lane acknowledged a stronger than expected recovery in the second quarter but expressed some concerns about this momentum faltering in the third quarter.

Earlier released PMI data from the euro area showed both the manufacturing and services sectors returning to growth. GDP was reported to decline by 12.1% last quarter. While high, the contraction was much smaller compared to the US.

Perhaps most noteworthy out of Europe is the unemployment rate. While the US has experienced record job losses, euro area unemployment was reported at 7.8% in June. Considering the impact the virus has had on the global economy, the figure is not all that much higher compared to the 7.4-7.5% range ahead of the virus outbreak.

Throughout July, EUR/USD had a fairly strong correlation with the equity markets. The currency pair is seen somewhat decoupling from this correlation as the dollar has been recovering since Friday while equities remain firmly bid.

Technical Analysis

EUR/USD is seen struggling near the 1.1800 level in early day trading and this level may act as a line in the sand for the rest of the trading session.

The level to watch over the next day or two falls at 1.1700. A drop below it could pave the way for a broader decline considering the level held the exchange rate higher yesterday and late last week.

The US dollar index (DXY) posted a doji candle on a daily chart yesterday. This may encourage dollar bears considering the bearish trend since March. However, if the index rallies above yesterday’s highs, it could catch some traders off guard which could renew the bullish momentum in the recovery.

Bottom Line

• EUR/USD has moved into a sideways range as the dollar attempts to recover.
• A break below 1.1700 could pave the way for a broader decline.

For a look at all of today’s economic events, check out our economic calendar.