EUR/USD Outlook: Dollar gives up oil driven gains as Powell testimony looms
EUR/USD Outlook: Dollar gives up oil driven gains as Powell testimony looms
The EUR/USD has eased back a tad after climbing to a fresh 2025 high on Tuesday. Much of the pair’s gains over the past couple of days stem from dollar weakness linked to the collapse in oil prices and shifting expectations around Fed policy. The markets are now fully pricing in a September rate cut, but calls are also growing for a cut in as early as July which was not even on the radar at the start of the week. News of the ceasefire agreement and the corresponding collapse in oil prices has certainly helped to undermine the dollar. The focus is turning to macroeconomics again and away from geopolitics, judging by how markets have behaved in the last couple of days. It looks like investors are fully confident that the ceasefire agreement will not be broken, which is why oil prices are still lower and global equities near recent record highs again.
Fed chair was neutral to slightly dovish
Powell was a little more neutral to slightly more dovish than markets had anticipated when he testified yesterday, no doubt helped by the collapse in oil prices. The US dollar index is now trading a little firmer, especially against the Japanese yen while also finding some mild support against other currencies too. The dollar bears will need to see further signs of weakness in the US economy to sell the greenback aggressively. On that note, there is not much data to look forward to today. But yesterday’s CB consumer confidence data came in weaker to provide fresh evidence of weakening consumer sentiment. There is also the possibility we could see a more mixed performance from the dollar – rising against weaker currencies and falling against the risk-sensitive currencies. That is of course unless a fresh flare up in the Middle East conflict sends oil prices spiking again.
What will markets focus on next?
Markets are now shifting their attention to the second days of Powell’s testimony later today, and expectations are that he will repeat more of what we already heard the day before. Recent dovish hints from a string of policymakers, including Waller, Bowman, and Goolsbee, who all expressed openness to earlier-than-expected rate cuts, means the upside potential for the dollar should remain limited while risk appetite remains strong.
However, if Powell walks back on the dovish Fed commentary today, then we could see the dollar turn more mixed. It could, for example, rise against low yielding currencies while underperforming risk-sensitive currencies like commodity dollars.
Meanwhile, the next big data release is the May core PCE inflation figure—the Fed’s preferred inflation measure – which will come out on Friday. The FOMC expects core PCE to end the year at 3.1%, a touch higher than the headline rate. These projections, however, rest on fragile assumptions about the impact of trade tensions and oil prices.
Soon, the focus will also turn back to trade and tariffs. With the July 9 deadline fast approaching, it is unlikely we will see a notable dollar recovery unless the US manages to strike deals with some of the more important trading partners like China.
Ceasefire weighs on crude oil and dollar
After holding its own surprisingly well during the height of the conflict, the EUR/USD has turned notably more bullish this week as markets shed the geopolitical risk premium tied to the Middle East. With Iran, Israel and the US all agreeing to a ceasefire, and oil prices plunging sharply over the last day or so, traders have been quick rotating back into dollar shorts. Now unless oil prices spike again, it is unlikely that the dollar will find support from this source. Normal day-to-day oil volatility should not cause too much concern for FX trade.
Mixed Eurozone data
The broader EUR/USD outlook remains balanced. While the dollar has largely been on the back foot so far this week, the euro’s own fundamentals are far from compelling. Monday’s eurozone PMIs landed roughly in line with expectations, showing that while business sentiment has stabilised, the economic outlook still points to stagnation. On Tuesday, German IFO survey however was a touch stronger at 88.4 vs. 87.5 last, though nothing ground-breaking. Later in the week, flash CPI prints from France and Spain will shed light on inflation dynamics that could influence ECB tone heading into July.
In other words, the euro isn’t rallying on strength. The drop in oil prices removes pressure on Europe’s energy-sensitive economy, which may support the single currency at the margins.
Still, some caution is warranted. The move higher in EUR/USD could stall if Powell resists delivering any dovish surprises today or we see a string of better-than-expected data. Longer-term, the dollar’s performance will depend on Trump’s ability to strike trade deals.
EUR/USD technical analysis and trade ideas
Source: TradingView.com
The higher highs and higher lows on the chart certainly paint a bullish EUR/USD outlook, or at least, it is largely keeping the bears at bay.
In terms of short term levels to watch, Monday’s oil-driven high at 1.1581 comes in just above the April high of 1.1573. This means the area between these two levels is now the first zone of potential support to watch. Below that, Friday’s high comes in at 1.1544 and then the psychologically important 1.15 handle comes into focus below that. As before 1.1450 remains the most important support area which was successfully defended on Monday. Bearish if we go below it.
On the upside, 1.1631, making the recent high, was tested and therefore the first bullish objective was already met. Thereafter you have round handles like 1.17 and 1.18 as the next potential upside targets.
In conclusion, the EUR/USD outlook has shifted into bullish territory for now—but it’s driven by weakness in the dollar more than strength in the euro. Traders are focusing on fundamentals again as geopolitics take a back seat.
Trader | Analyst | TradingCandles.com
e: Fawad.Razaqzada@TradingCandles.com
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