EUR/USD: Facing Mixed Outlook Amid Investor Indecision

Highlights

• EUR/USD experiences slight decline due to investor indecision and anticipated volatility.
• Eurozone manufacturing contracts as ECB’s tightening policies affect industrial sector.
• Federal Reserve and ECB Policies Impact EUR/USD

Overview

The EUR/USD is down slightly, while posting an inside move on Monday due to investor indecision and anticipated volatility. With light trading volume ahead of the U.S. bank holiday for Independence Day, the Euro weakened against a stronger U.S. dollar. Traders are eagerly awaiting key economic data to gain insights into the Federal Reserve’s rate hike trajectory.

Fed’s Inflation Control Leads to Stagnant US Consumer Spending

On Friday, stagnant U.S. consumer spending in May indicated gradual effects of the Fed’s efforts to curb inflation. However, the core PCE price index, the Fed’s preferred measure of inflation, rose by 4.6% year-on-year in June, following a 4.7% increase in April. Investors currently perceive an 87% probability of a 25 basis points rate hike in July, with expectations of rates remaining between 5.25% and 5.5% before experiencing cuts in 2024.

Euro Zone Manufacturing Contracts Due to ECB Policies

In the euro zone, manufacturing activity faced headwinds as the European Central Bank (ECB) tightened its policies. Manufacturing activity contracted more than expected in June across all four major euro zone economies. The final manufacturing Purchasing Managers’ Index (PMI) fell to 43.4. This is its lowest level since the COVID-19 pandemic, indicating a decline from May’s reading of 44.8. The ECB’s interest rate hikes negatively impacted the capital-intensive industrial sector and deteriorated its outlook.

ECB’s Hawkish Stance: Inflation Impact

To combat high inflation, the ECB has already raised key rates by 400 basis points, with another 25 basis points hike expected this month. However, this tightening policy adversely affected consumer and business spending power, further impacting the manufacturing sector’s performance. Morgan Stanley revised its forecast for the ECB’s terminal rate to 4%, reflecting a more hawkish stance on interest rates based on June’s inflation data and policymakers’ statements at the ECB Forum on Central Banking in Sintra.

Upcoming US Data: Fed Policy Minutes

Looking ahead, significant economic data releases in the United States include the U.S. Labor Department’s job openings and labor turnover survey, the monthly payrolls report, and the minutes of the June 13-14 Fed meeting. Positive economic indicators could prompt a short-term hawkish stance from the Fed. However, the Euro may find medium and long-term structural support if the Fed concludes its hiking cycle in the latter half of 2023.

Short-Term Outlook:  Anticipated Volatility

In conclusion, the EUR/USD faces a mixed outlook in the short term due to investor indecision and anticipated volatility. A stronger U.S. dollar and concerns over the euro zone’s manufacturing sector weigh on the Euro’s appeal. The trajectory of the Fed’s rate hikes and the ECB’s tightening policies will continue to shape the currency pair’s dynamics. Traders and investors will closely monitor upcoming economic data releases and central bank decisions for guidance on the EUR/USD’s trajectory.

Technical Analysis

The EUR/USD market is currently showing neutral sentiment. The 4-hour price has risen slightly compared to the previous close, indicating a small upward movement. While the price is trading above the 200-4H moving average, suggesting a medium-term uptrend, the presence of the 50-4H moving average above the current price acts as a resistance level. The 14-4H RSI is in the neutral zone, indicating no extreme bullish or bearish sentiment.

The market is currently trading within a range between the main support and resistance areas, further contributing to the neutral sentiment. Traders should closely monitor price movements for a potential breakout.