EurUsd Weekly Outlook for June 12, 2023 – Attention Shifts to Interest Rates Decisions

• Now that the threat of a U.S. default has receded, this week’s spotlight shines on the Federal Reserve (FED) and its decisions on interest rates. The European Central Bank (ECB) also enters the frame, as global economies navigate an economic slowdown that thankfully hasn’t segued into a recession, providing Federal Reserve Chair Powell some comfort regarding the ongoing restrictive monetary policy.
• Mediterranean economies in Europe have begun showing signs of a slowdown, with producer prices increasingly under control. This may prompt the ECB to implement a final increase in the cost of borrowing before taking an extended hiatus.
• Recent weeks have seen the Euro-Dollar (EurUsd) pair flexing its bearish muscles, a development worth monitoring. With key supports poised between 1.05 and 1.065, a downward breach could necessitate notable changes in strategy.

The Market’s Dichotomy: Bonds and Equity

Recently released economic data, particularly inflation figures for consumer and production, have drawn keen market attention. The FOMC meeting scheduled for June 14th isn’t expected to bring any major policy changes from the FED, which remains committed to inflation control. Comforted by the soft landing the economy seems to be making, and the last-minute avoidance of a default facilitated by an agreement between Republicans and Democrats that postponed the issue to 2025, analysts now turn their attention to a peculiar divergence. The bond market appears open to the idea of a recession, while the equity market does not.

In Europe, an interest rate hike seems inevitable, with a further adjustment likely in September. A slowing momentum is noticeable in Spain and Italy, the continent’s two key recovery engines. As manufacturing PMIs have dipped below 50, the services sector has also shown a pullback from its April figures. The anticipation is that Germany and France will step in to stabilize the situation.

Producer price dynamics also suggest the ECB might soon switch to stand-by mode. Having risen only 1% in April compared to March’s 5.5%—the lowest reading since January 2021—these numbers should reflect a cooling in consumer prices by the second half of 2023.

Technical Analysis

Is this a New Trend or a Brief Correction?

The 200-day moving average, undeniably a crucial indicator for the euro’s future prospects, has presented an interesting situation. As indicated in this first graph, the exchange rate has relied on dynamic support for the third time in 2023 without breaching it. This situation underlines the importance of the ADX, a trend strength indicator, which has crossed 30 on the decline. This development signals a bearish control and, as seen in previous instances, an ADX in this position often precedes a longer-term trend. This could suggest another dip to 1.05 by EurUsd. Dropping below this level could open up unexpected opportunities for the dollar, potentially riding on a more dovish ECB stance on rates or a more hawkish FED.

A cornerstone of technical analysis is the nuanced understanding of Fibonacci numbers. The concept of a 50% retracement is a recurrent theme, acting as a traditional pivot point in our charts. This principle is clearly illustrated in the case of the EurUsd pair, where this level has posed a formidable barrier to the euro’s rally. The halfway retracement of the 2021-2022 bearish cycle has met resistance around the 1.105 mark. As previously observed, this has proven to be a significant obstacle. Should the exchange rate revisit this pricing area, we’ll look towards the 1.125/1.13 zone, a critical juncture as per the Fibonacci principle. This point represents the 61.8% retracement of the entire bearish trajectory.