Following Monday’s drop, we saw European markets and US futures bounce back in the first half of Tuesday’s session. Trade deal optimism and better-than-expected results from European companies such as AstraZeneca and Royal Philips soothed investor concerns ahead of big US tech earnings this week. And with that, you’d expect the risk sensitive commodity dollars to back. But they have extended their slide against the US dollar instead. The EUR/USD has also weakened further after finding some mild around the 1.1550 area. Traders are looking ahead to the release of US JOLTS job openings later today and other key macroeconomic events throughout the week, including the FOMC rate decision. These events have the potential to impact the EUR/USD forecast, although much of the attention remains on trade negotiations.

Not much to cheer for euro investors over EU-US trade deal

The dollar has shown some signs of life this month after repeatedly coming under pressure due to multiple factors, ranging from the impact of tariffs to fiscal uncertainties and concerns about US creditworthiness. But some of those concerns have eased with the US managing to strike trade agreements with the European Union and Japan.

Markets were expecting a deal to be reached between the EU and US, so when the news emerged at the weekend, we saw an initial spike higher in index futures. But then we saw investors take profit in a classic ‘buy the rumour, sell the fact’ market reaction. The fact that markets have bounced back today suggests investors have been buoyed by hopes that the US-EU trade accord might draw a line under recent uncertainty, offering European businesses a clearer path forward. But the euro’s reaction to the news, however, wasn’t great. FX investors — and indeed several European leaders — appeared to reach the view that, on balance, broad-based tariffs would be more of a burden than a boon.

So, while the EU has prevented an imminent trade war with the US, critics argue that the deal is bad for the EU and will cause inflation to rise in the US. Accordingly, the EU will seek to expand on some of the elements negotiated over the weekend, according to reports. This may mean more delays before signing a deal.

Still, once the dust settles, the inclusion of key sectors such as pharmaceuticals and semiconductors under the 15% tariff bracket may be interpreted as something of a silver lining. For now, Europe may simply have to press on, perhaps with renewed attention to bolstering domestic demand.

And then there is the ongoing US-China trade talks. Officials from Beijing and Washington are trying to extend their tariff truce beyond a mid-August deadline, in an effort to find ways to maintain trade ties while safeguarding economic security.

Keep an eye on oil prices

It is also worth keeping an eye on the energy markets, where President Trump’s decision to bring forward the deadline for Russia to agree to a ceasefire has ever so slightly heightened the prospect of secondary sanctions being imposed on foreign purchasers of Russian crude — namely China, India, and Turkey. Any resultant spike in oil prices, driven by fears of Russian supply being curtailed from the global market, would likely weigh on euro and lend support to the US dollar, and it may therefore undermine the EUR/USD forecast.

What’s next for the EUR/USD forecast?

As the week progresses, investor attention will turn squarely to the US Federal Reserve, with its latest policy decision due this Wednesday. While a rate cut remains improbable at this juncture — despite persistent political pressure — the accompanying commentary from Fed Chair Jerome Powell could prove pivotal. Markets will be listening intently for any shift in tone that might hint at changes in the monetary policy trajectory.

The implications for the EUR/USD forecast are significant. Any dovish tilt from the Fed could weaken the US dollar and bolster the appeal of the world’s most popular currency pair. Conversely, if the central bank maintains a hawkish stance in the face of stubborn inflation, the single currency may face fresh resistance as the dollar and yields find support.

In addition to the Fed, a slate of important US economic data is on the docket. GDP data, labour market figures, and other key metrics are expected to offer further insights into the health of the world’s largest economy. These numbers could either reinforce or challenge the current policy narrative — and will certainly factor into short-term movements in both the dollar and yields.

Technical EUR/USD forecast: Key levels to watch

Despite Monday’s big drop, it is far too early to suggest the EUR/USD forecast has turned bearish from a technical perspective. That’s because all the major support levels remain intact. The most important area of support for me is between 1.1500 to 1.1570ish, where the EUR/USD has previously found both support and resistance in the past. The bears will need to push rates below this zone to cause a dent in the still-bullish market structure. Below this area, the next key battleground is between 1.1210-1.1275, meaning there is a fair bit of ground to make for the bears.

On the upside, 1.1600 is now the first level of resistance to watch. Above it there is not much further resistance seen until we get near the 1.1700 area.

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R