EUR/USD Weekly Forecast July 24-28
Frankfurt (July 23) EUR/USD posted a second consecutive week of gains and posted the highest weekly close since early January. A major driver for the pair in the past week was the ECB monetary policy meeting which saw the pair close about 115 points higher on the day.
ECB President Draghi was much more dovish than the markets had expected following his early speech in Sintra, Portugal. The main takeaway was that policymakers want to see prices and wages rise and that the last thing the Bank wants to do is tighten monetary policy prematurely and risk hindering the recovery.
Despite Draghi treading carefully, EUR/USD bulls drove the pair above resistance from the 2016 high at 1.1616 following the meeting.
The focus in the upcoming week will shift to US monetary policy as the Federal Reserve will hold its monetary policy meeting on Wednesday.
The Fed raised rates at the June meeting and is not expected to act in the upcoming week. The meeting will not accompany a press conference or updated forecasts.
Market participants will be primarily looking for guidance on US inflation. Specifically, it will be important whether policymakers continue to view poor inflation data as a result of transitory factors.
There has been some speculation that the Fed will announce a start to balance sheet normalization as early as September. Forward guidance regarding balance sheet tightening stands to impact the dollar, and as a result, the currency pair.
In addition to the Fed meeting, US consumer confidence figures will be released on Tuesday and durable goods orders on Thursday. Friday’s release of US second quarter GDP will be the first release, and as such, stands to cause volatility to the dollar pairs.
The latest COT report showed a fourth consecutive weekly build in the euro net long. Non-commercials increased net long exposure from 83,788 contracts to 91,321 contracts mostly on an increase of long contracts. The net long position remains the largest in six years.
The euro gross short has been mostly unchanged over the last three readings although price action in the past week suggests a short covering of some degree took place following the COT report cut off.
The technical break in EUR/USD sets a bullish tone but there are significant hurdles to the upside. The first level of resistance falls at 1.1714 which marks the 2015 high. Above it, a horizontal level at 1.1767 has been respected on a monthly chart. The weekly 200-period moving average falls at 1.1804 and due to its proximity to the psychological 1.1800 handle, the level is considered significant resistance in the week ahead.
A break above the 2015 high of 1.1767 could trigger a liquidation of longer term short positions and can accompany a jump in upside momentum.
The first level of support falls at the 2016 high of 1.1616. Further support is found from the February 2015 high of 1.5338.
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