In the Tokyo session, S&P500 futures experienced some losses, indicating caution among EUR/USD investing as the second-quarter earnings season begins. This cautious sentiment also spilled over to US equities on Friday amid concerns over potential volatility in corporate earnings, driven by the Federal Reserve’s aggressive policy tightening and tight credit conditions imposed by commercial banks to safeguard asset quality.
Investors Await Trigger for Directional Guidance as EUR/USD Investing Turns Sideways
The US Dollar Index (DXY) is displaying signs of volatility after stabilizing just below 100.00. Market participants anticipate a significant move in the USD Index following the release of US Retail Sales data. Consensus estimates point to an expected expansion of monthly retail demand at a higher pace of 0.5%. Excluding automobile sales, retail demand is heading toward growing by 0.3%, up from the previous release of 0.1%.
Meanwhile, the euro remains strong as the ECB is expecting to continue its rate-hiking trajectory beyond July. Headline inflation stands at 5.5%, while core inflation (excluding volatile oil and food prices) is at 5.4%, significantly exceeding the desired 2% target.
However, economists at Nordea believe that the ECB’s tightening measures may soon come to an end, with another rate hike in July expected to be the final one in the current cycle.
EUR/USD Holds Steady Below 1.1250 Amidst Last Week’s Gains
The EUR/USD pair maintained its position below the 1.1250 level after a strong rally last week. That way, it marked its highest level since February 2022. USD weakness following lower-than-expected US CPI and PPI data has largely affected the upward move. The shift has raised expectations that the Federal Reserve was nearing the end of its tightening cycle. While the market has largely priced in a 25 basis point hike in July, the probability of another rate increase this year is currently estimated at just 22%.
Additionally, the euro received support from hawkish ECB minutes. It signaled the central bank’s intention to implement further rate hikes to address inflation and reach the targeted 2% level.
Today, the USD remains under pressure despite a risk-off sentiment in the market triggered by China’s GDP data.
No major eurozone data releases are scheduled for today. Besides, Italian final inflation figures are unlikely to have a significant impact. In the US, the New York State Manufacturing Index will be closely watched, setting the stage for the release of US retail sales data tomorrow.
EUR/USD Outlook – Technical Analysis
Following the sharp rally last week, EUR/USD encountered resistance at 1.1250. The pair is now in an overbought condition, which could lead to a downward correction or consolidation around current levels in the short term.
Initial support is seen at the psychological level of 1.12. If this level holds, sentiment toward the euro may improve, with bullish traders aiming to push the pair higher toward 1.13.
However, a break below 1.12 would bring the May high of 1.1095 into play, followed by the falling trendline support at 1.0990.