EUR/USD Outlook: Euro Breakout Imminent, ECB Officials in Focus

EUR/USD ANALYSIS

• German industrial production and Chinese balance of trade data places euro on the backfoot in early European trade.
• All eyes on ECB speakers today.
• Bearish pennant breakout looming.

EURO FUNDAMENTAL BACKDROP

The euro is down against the US dollar once more this Wednesday morning citing a significant miss on Chinese balance of trade for May – highlighting slowing global demand. Historically, the euro tends to be positively correlated to the Chinese economy hence the euro selloff. In addition, German industrial production echoed similar sentiments (see economic calendar below) missing forecasts and heightening recessionary fears. Economic indicators for the eurozone have also been pointing to a slowing economy via recent inflation and PMI data. The escalating situation in Ukraine is yet another negative for the currency which looks to continue at least in the short-term – backing the safe haven appeal of the greenback.

EUR/USD ECONOMIC CALENDAR (GMT +02:00)

Source: DailyFX economic calendar

The European Central Bank (ECB) has been one of the sole supporters for the euro and with several ECB speakers on the docket today, the hawkish narrative may be supplemented. Already the ECB’s Schnabel has stated the central bank has more ground to cover, getting the aggressive ball rolling.

Looking at current money market pricing below, it is almost certain that the ECB will hike by 25bps next week and possibly leave the door open for further monetary policy tightening.

ECB INTEREST RATE PROBABILITIES

Source: Refinitiv

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Daily EUR/USD price action now approaches the apex of the bear pennant formation (black). A breakout and confirmation close below pennant support could see the pattern unfold in textbook fashion towards subsequent support zones. From a bullish perspective, a move above pennant resistance could negate the downside move and support euro strength.

Resistance levels:

• 1.0800
• 1.0736
• 1.0700

Support levels:

• 1.0615
• 200-day MA (blue)

IG CLIENT SENTIMENT DATA: BULLISH

IGCS shows retail traders are currently LONG on EUR/USD, with 65% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment but due to recent changes in long and short positioning we arrive at a short-term upside bias.

Contact and followWarrenon Twitter:@WVenketas