At the beginning of this week’s trading that the price of the euro currency pair against the dollar, EUR/USD, may continue to move in narrow ranges until the markets and investors react to the testimony of US Federal Reserve Governor Jerome Powell and a number of bank officials. The gains of the recent bullish rebound for the EUR/USD currency pair extended to the 1.0970 resistance level, before settling around 1.0915 at the time of writing.
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According to the future of the European Central’s policy, which was the reason for the euro’s recent gains against the rest of the other major currencies, rapid wage increases are a major threat to the inflation outlook in the eurozone, according to European Central Bank Governing Council member Madis Mueller. “If the rise in wages — which has accelerated in the eurozone — continues so quickly, the decline in core inflation may be slower than currently expected,” Mueller told Bloomberg in Tallinn. Mueller added that this “may also mean that stabilizing inflation firmly at 2% over the medium term could become more complicated.” “This is something we have to pursue.”
While policymakers including Mueller are reluctant to discuss what might happen after another hike expected in July, others warn that a rate hike may still be needed at the next meeting in September. They are mostly worried about core inflation, which has fallen to a lower level but still high, and they don’t want to stop their historic campaign to tighten monetary policy prematurely, only to resume it in the future.
Last week, the European Central Bank said in its latest round of economic projections that wage growth will remain well above its historical average, driven by inflation compensation, a tightening labor market and increases in the minimum wage.
- The price of the EUR/USD currency pair is still heading higher on its short-term timeframes, forming higher lows connected to an ascending trend line that has been holding all month.
- The price looks ready for another test of support soon.
- The Fibonacci retracement tool shows that the level of 61.8% lines up with the trend line around 1.0830.
- A shallow correction might find buyers already at the 50% Fibonacci retracement at 1.0873 or the 38.2% level which lines up with the 100 SMA near the key psychological mark of 1.0900.
The 100 SMA is above the 200 SMA to indicate that there is a bullish turn or that the support is more likely to hold than break. The gap between the indicators is widening to reflect stronger bullish pressure, while the 200 SMA lines up with the trend line adding to its strength as support. Meanwhile, stochastic appears to be heading higher but is also moving sideways to reflect consolidation. The RSI is also on a middle ground to hint that EUR/USD may be range bound for the time being.
Overall, the EUR may take cues from PMI readings due later in the week, as these could provide clues as to whether or not the ECB may maintain its tightening pace. The latest ECB decision to raise interest rates again showed as expected, with Governing Council Chair Lagarde hinting at further increases in borrowing costs. However, the PMI numbers point to another dip in manufacturing and services sector activity, which may lead the central bank to moderate its optimism.
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