Dollar Declines Amid Profit-Taking. PCE Data Ahead

EUR/USD Faces Double Top, Bearish Divergence.

On Friday, the greenback slipped against most major currencies as traders took profits after a full week of gains. However, the US Dollar still shows signs of strength, boosted by strong economic data that has tempered expectations for interest rate cuts.

Recent data highlighted a robust U.S. economy, with Thursday’s PMI reports showing a surge in U.S. business activity in May in both the Services and Manufacturing sectors.

Federal Reserve minutes from the latest meeting revealed a back-and-forth among policymakers regarding whether current rates are sufficiently high to combat inflation. By the end of the week, the dollar index (DXY) fell by 0.3% to 104.74 after advancing in five of the previous six sessions, closing the week with a modest 0.2% gain. Meanwhile, the euro climbed 0.3%, closing the week at $1.0845.

Stronger-than-expected U.S. economic data has led traders to push back the timing of the first anticipated Fed rate cut to September. At the time of writing, the CME FedWatch tool shows a 99.1% chance that the rate will remain unchanged at the next FOMC meeting, in June. However, this week’s Core PCE Price Index may alter that reading.

Economic Calendar Highlights

U.K. banks celebrate Spring Bank Holiday today and U.S. banks are closed in observance of Memorial Day. The first notable release comes Tuesday in the form of the U.S. Consumer Confidence survey, scheduled for release at 2:00 pm GMT.

Wednesday at 12:00 pm GMT we take a look at the German Preliminary version of the CPI. Thursday, traders will shift their attention to the U.S. Preliminary GDP release, scheduled for 12:30 pm GMT.

The most important day of the week will be Friday, with inflation data for the European and U.S. economies. At 9:00 am GMT the Core CPI Flash Estimate will be released, showing the change in the price of goods purchased by Europeans, while the U.S. Core PCE Price Index will come out later in the day, at 12:30 pm GMT. The PCE index shows the change in the price of goods and services bought by Americans, excluding food and energy. This is the Fed’s preferred gauge of inflation and is expected to show a 0.2% change, down from last month’s 0.3%.

Technical Outlook – EUR/USD

The pair is currently trading at 1.0850 after creating a double top at 1.0890, which pushed it as low as 1.0800. The greenback showed strength last week but most of the gains were erased by Friday’s profit-taking spree.

The double top mentioned earlier also shows bearish divergence because the RSI was higher during the second touch of 1.0890 than it was during the first. It’s not the strongest form of divergence but it’s a bearish signal nonetheless.

Unless we see an easy and swift break of the double top, the pair is likely headed toward the confluence zone at 1.0775 where it will encounter horizontal support, dynamic support (the 50-day MA), and diagonal support (the bearish trend line).