Euro at Critical Junction, 7-Year Low Threatened

EUR/USD Shows Erratic Behavior Ahead of Key Inflation Data.

After the double bottom pattern that appeared at 1.0350 support, the Euro strengthened and made its way closer to the resistance at 1.0635. The single currency was also boosted by the European Central Bank’s indication regarding a 25 bps rate hike in July, followed by a potential 50 bps increase in September.

Going forward, the Euro may be weighed down by gas shortages, which may have dire repercussions for the German industrial sector and could extend to other European economies. Russia has supplied about 60% less gas than Germany needs and German Economy Minister Habeck signaled that some industries will be facing difficulties in the winter.

Usually, in the summer, European countries increase their gas storage to protect themselves against shortages in winter. However, if the supply is short during the summer, the low inventory levels will spell trouble in the winter.

Key Data for the Week Ahead

The first notable event of the week is the U.S. Consumer Confidence survey that is scheduled for release Tuesday at 2:00 pm GMT. As the name suggests, the survey measures confidence among U.S. consumers, which is tightly correlated with consumer spending. A higher than anticipated number usually strengthens the US Dollar.

Wednesday at 1:30 pm GMT, ECB president Lagarde, Fed Chair Powell, and BOE Governor Bailey will participate in a panel discussion called “Policy panel”. The discussion will take place at the European Central Bank Forum on Central Banking and it could be a catalyst for increased volatility.

Thursday at 12:30 pm GMT the Core PCE Price Index will be released, offering insights into the levels of inflation in the United States. It shows changes in the price paid by consumers for the services and goods they purchase, excluding food and energy. Usually, the CPI (released about 10 days earlier) gets the most attention but the PCE index also acts as a major inflation gauge.

The last release of the week comes Friday at 2:00 pm GMT: the ISM Manufacturing Index. It’s a survey of purchasing managers from the manufacturing industry and acts as a leading indicator of economic health with a medium impact on the currency.

Technical Outlook – EUR/USD

The pair is currently trading at 1.0560 but the price action is choppy and the Daily candles are showing long wicks, which is a sign of indecision. This suggests that the rally that started at the 1.0350 double bottom doesn’t have enough momentum to extend past 1.0635 resistance.

The 50-day Moving Average is sitting just above the current price and a bearish trend line is in close vicinity, as is the horizontal resistance at 1.0635. These elements create a confluence zone that is usually difficult to break.

If the rally fails at current levels, we may see a new attempt to break the double bottom. That level is also a 7-year low, thus a break would be a major technical event and we could be talking about a move to parity (1.0000) in the longer term.