• EUR/USD forecast dims on weakness in Eurozone data as trade optimism keeps USD supported
• US dollar stages a modest rebound, but questions linger over longevity amid debt worries
• EUR/USD could break 1.13 support

In recent days, the US dollar has been supported in part by encouraging noise surrounding EU–US trade discussions. While this sort of optimism would normally be supportive of the euro, it is just that the greenback had been trading more like an emerging market currency – falling with trade uncertainty and rising with trade optimism. Right now, it is the latter, but it could flip again. It looks like the dollar has lost its haven appeal, with traders put off by Trump’s erratic policy shifts and the ballooning US debt. For now, the EUR/USD forecast is not looking as bullish as it did a few days ago, so a bit of a retracement seems to be on the cards – especially with Eurozone data also weakening.

Soft Eurozone data weighs on EUR/USD forecast

The euro, which was buoyed by haven flows, has started to lose steam. It has fallen for the second day in a row against the US dollar. The lack of further upside means it will need a fresh dose of stimulus to drive it higher. Without that, there is a risk the EUR/USD now drifts further lower as investors weigh the impact of ECB rate cut expectations.

Meanwhile, on the economic front, a touch of softness crept in. German import prices fell more than expected by 1.7%, which is deflationary. We also had a sharp rise of 34K in German unemployment, while French consumer spending rose only by 0.3% m/m instead of 0.8% expected. Speaking of France, yesterday it posted a negative month-on-month CPI (-0.1%) figure for May. Should similar prints emerge from other member states in Friday’s round of data, markets may well begin to factor in a heightened probability of the ECB cutting rates by an additional 75 basis points as the year progresses.

As for as the EUR/USD forecast is concerned, well the pair has consistently found solid footing around the 1.130 handle over the past month and a half, with occasional short-lived dips. That said, should the US continue to produce stronger-than-expected data, a decisive move lower cannot be ruled out. Nevertheless, we suspect markets remain hesitant to fully unwind the dollar’s risk premium, particularly with concerns over ballooning deficits resurfacing. For now, though, a move below 1.130 remains a credible scenario.

Source: TradingView.com

EUR/USD forecast: Dollar finally shows signs of life

The US dollar has managed to claw back some ground this week, notably against the yen and to a lesser degree commodity currencies, despite a notable improvement in broader risk appetite. A stronger-than-expected US consumer confidence print added a tailwind, while a sharp slide in the yen following Japanese bond market rumours only strengthened the greenback’s hand—at least temporarily.

With little in the way of fresh impetus, it remains to be seen whether the dollar rally will continue. As we look ahead to the back half of the week, a suite of heavyweight US economic data—GDP, jobless claims, Core PCE—will likely determine whether this nascent recovery can take root or proves short-lived.

What about the long-term EUR/USD forecast?

Markets are once again pricing in a more constructive phase in US-EU trade relations, after President Trump’s weekend reversal on the threatened 50% EU tariff caught many off guard—but in a good way. The result has been a swift pick-up in risk appetite, a bounce in European equities, and a boost for the dollar, which had been wobbling under the weight of trade uncertainty.

Still, one would be remiss to assume this signals a lasting détente. The ever-looming spectre of tariff brinkmanship remains, and if past episodes are anything to go by, the dollar tends to suffer when such sabre-rattling resumes. Add to this an increasingly uneasy investor base wary of Washington’s erratic policy shifts, and it’s not difficult to see why confidence in the greenback remains tentative.

Beyond trade, the elephant in the room is the growing discomfort over America’s fiscal position. The dollar may be modestly undervalued on some measures, but investors aren’t blind to the ticking time bomb that is US public finances.

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R