EURUSD faces key test next week

The EUR/USD’s recent rally finally came to a halt this week. The world’s most heavily-traded FX pair was initially boosted by robust Eurozone PMI data and amid speculation that the ECB was considering tapering its QE stimulus programme earlier than expected. But Mario Draghi, the ECB President, remained tight-lipped at a speech earlier this week despite calls for tighter monetary conditions from Germany and stronger data from the Eurozone. In the US, sales of new and existing homes in April came in weaker than expected, but the upward revision to 1.2% in first quarter GDP provided some much-needed relief for the dollar. Despite the recent soft patch in US data, the market still expects the Fed to raise interest rates in June, but may revise those expectations if incoming data from the world’s largest economy deteriorates sharply in the next two and a half weeks. In fact, the economic calendar is jam-packed with key data from both the Eurozone and the US next week. As a result, it should be a volatile week for the EUR/USD pair:

Eurozone data

• Monday: ECB President Draghi speech
• Tuesday: German and Spanish CPI
• Wednesday: German retail sales and Eurozone CPI

US data

• Tuesday: Core PCE Price Index, personal spending and CB consumer confidence
• Wednesday: FOMC Member Kaplan speech, Chicago PMI and pending home sales
• Thursday: ADP private sector payrolls report and ISM manufacturing PMI
• Friday: nonfarm payrolls report, average hourly earnings and trade balance  

Unless we see a marked deterioration in next week’s US data, if the numbers are generally in line with or better than expectations then that should keep a June rate hike on the table. But whether or not this will inspire renewed dollar buying remains to be seen, as a rate increase appears to be priced in.

Nevertheless, the EUR/USD has shown some technical weakness signs. The failure of price to hold above this last week’s high and this week’s opening level around 1.1200 is not exactly bullish. But the lack of a more significant drop means the potential remains for the EUR/USD to rise and test liquidity above the old swing high at 1.1300 before making its next move. But in the event that the EUR/USD drifts lower next week, then the first key area of support that the bulls would then need to defend would be around 1.1000/20, the previous resistance zone. A potential break below here could reopen the prospects of a drop to fill that unfilled void from mid-April between 1.0725 and 1.0820.

As the technical outlook for the EUR/USD is currently vague, traders may wish to take it from one level to the next until things become clearer. That would certainly be our approach anyway.