Trade Of The Week: Will Central Bank Heavyweights Spark EURUSD Breakout?

Watch this space because the EURUSD could turn volatile over the next few days!

Investors will be served a tantalizing combination of key economic reports and speeches from policymakers this week. However, the main course and potential market shaker could be the ECB’s three-day forum in Portugal’s Sintra which kicks off today. The forum will be focusing on “the challenges for monetary policy in a rapidly changing world” with Wednesday’s panel discussion featuring central bank heavyweights in sharp focus.

Before we sink our teeth into what to expect from the major events and EURUSD in the week ahead, it is worth keeping in mind that the euro has appreciated against most G10 currencies quarter-to-date. But against the mighty dollar, the currency is down roughly 4.7% due to the ECB lagging behind the Fed, which has moved aggressively to tame inflation.

Taking a quick look at the technical picture, the EURUSD is balancing above significant support at 1.0400 on the monthly timeframe. The last time prices secured a monthly close below this level was in December 2002.

The trend is heavily bearish on the weekly timeframe as there have been consistently lower lows and lower highs.

Now, this is where things get interesting.

On the technical charts, the EURUSD remains in a downtrend with the widening policy divergence between the ECB and Fed supporting bears in the past. However, the ECB has recently joined the hawkish camp and signalled to markets it plans to raise interest rates by 25 basis points in July. In fact, the central bank could also move ahead with a 50bps hike in September as it battles the inflation beast! Such a development is likely to favour euro bulls – limiting downside losses on the EURUSD.

The week ahead: data, policymakers, and more…

Grab your popcorn and find a comfortable seat because the show is about to begin.

On Tuesday, San Francisco Fed President Mary Daly will be under the spotlight. Last Friday she stated that another 75 basis point interest rate hike in July is her “starting point” but if the economy slows more than expected a 50 basis point could be reasonable. Investors will also be presented with the US consumer confidence data for June which is expected to deteriorate further.

Several Fed officials will be making an appearance on Wednesday.

However, the main risk event will be the ECB panel featuring ECB President Christine Lagarde, Fed Chair Jerome Powell, and BOE Governor Andrew Bailey.

Investors will be closely watching the panel discussion for fresh insights on how the central bank heads plan to fight inflation while trying to engineer a soft landing for the global economy. Given how markets remain highly sensitive to rate hike expectations, any fresh clues about future rate hikes could trigger fresh volatility in the FX space. On the data front, Eurozone economic confidence, German inflation figures for June, and third print US Q1 GDP figures will also be published.

On Thursday, it’s all about the Eurozone unemployment figures for May which are expected to remain unchanged at a record low of 6.8%. In the United States, the weekly initial jobless claims, personal income/spending, and PCE deflator for May will most likely hijack the spotlight in the afternoon.

Given how the core Personal Consumption Expenditure (PCE) Index is the Fed’s favoured measure of inflation, this will be closely scrutinised by market players.

According to a survey on Bloomberg, the PCE Core Deflator YoY is expected to have cooled to 4.8% in May compared to the 4.9% witnessed in the previous month. If expectations match reality, this could fuel speculation around inflation peaking – cooling rate hike bets and weakening the dollar.

To conclude the week, the flash Eurozone CPI figures and manufacturing PMI for June will be published. Eurozone inflation is estimated to have hit 8.5% in June, higher than the record-high of 8.1% seen in May. If the reports meet expectations, this could boost speculation over the ECB adopting an aggressive approach towards higher interest rates to fight inflation. Such a development could boost the euro. We also have the US ISM manufacturing and Global manufacturing PMI figure for June on Friday afternoon which may show how the US economy is coping amid the Fed’s aggressive rate hiking cycle.

With so much going on this week, the EURUSD has the potential to throw investors on a roller coaster ride!

EURUSD poised to breakout from range?

Over the past few weeks, the EURUSD has been trapped within a wide range with support at 1.0350 and resistance at 1.0780. Although the overall trend remains bearish, there seems to be a struggle between bulls and bears and this continues to be reflected in price action.

There are a couple of scenarios that could play out on the EURUSD in the week ahead.

1. A solid breakout and daily close above 1.0630 may trigger an incline towards 1.0780 and 1.0920.

2. Prices fail to conquer the 1.0630 resistance which results in a decline back towards 1.0480, 1.0350, and 1.0200.

3. Prices remain trapped within the 1.0480 support and 1.0630 resistance level with a possibility of sinking back towards 1.0350.