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EUR/USD Daily Chart Analysis

EUR/USD Faces Increased Downside Risks Amid U.S. CPI, Fed Meeting

The EUR/USD pair has been under significant pressure, driven by a convergence of fundamental economic and geopolitical factors. Key among these is the upcoming U.S. Consumer Price Index (CPI) release and the Federal Reserve’s policy meeting, both of which are pivotal in shaping investor sentiment and market expectations. The anticipation of these events has heightened market uncertainty, with investors leaning towards bearish positions.

Compounding this uncertainty is the political landscape in Europe. The snap elections in France have exacerbated existing concerns about the country’s fiscal health, particularly regarding budget deficits. This political instability has contributed to a flight to safety, with investors seeking refuge in more stable assets. This shift in sentiment is evident in the widening of German-French yield spreads, as well as the German-Italian yield spreads, reflecting a broader trend of risk aversion in the European bond markets.

From a technical standpoint, EUR/USD has breached several key support levels, reinforcing the bearish outlook. The pair recently fell below the daily Ichimoku cloud base and touched a 1.5-month low, signaling a strong bearish momentum. The break of the 61.8% Fibonacci retracement level of the 1.0602-1.0916 rally indicates a deeper correction might be underway.

Key technical indicators also point to further downside risks. The Relative Strength Index (RSI) on both daily and monthly charts is declining, and a bearish divergence was noted at the three-month high set earlier in June. The formation of inverted hammer candles on both the daily and monthly charts underscores the bearish sentiment. Moreover, the pair is trading below significant daily moving averages, including the 55-day and 200-day moving averages, which typically signifies a sustained downtrend.

Market Sentiment and Future Outlook

Investor sentiment remains heavily skewed towards caution, primarily driven by the safe-haven appeal of the U.S. dollar. This is further supported by the widening German-U.S. yield spreads, which enhance the dollar’s yield advantage over the euro. Additionally, the recent movements in USD/CNH, which saw a rally to 7.2744, have added downward pressure on EUR/USD.

For EUR/USD to stabilize or reverse its recent losses, two critical conditions must be met. Firstly, the U.S. CPI data would need to come in below market expectations, easing fears of persistent inflation and potentially reducing the pressure on the Fed to maintain an aggressive rate hike trajectory. Secondly, the Federal Reserve would need to signal a potential rate cut or at least a more dovish stance for 2024, which could undermine the dollar’s strength.

In summary, the combination of bearish technical signals, heightened geopolitical risks, and fundamental economic concerns suggests that downside risks for EUR/USD are likely to persist in the near term. Investors should brace for potential volatility around key economic data releases and central bank communications, which could significantly influence the pair’s trajectory.