The impressive gains of the EUR/USD pair have propelled it to multi-month highs, indicating the potential for further upside. This surge can be attributed to a combination of factors, including dollar vulnerability, technical patterns, and the prevailing disinflation narrative. Market participants are eagerly analyzing the trajectory of the currency pair, recognizing the importance of understanding the key drivers shaping the EUR/USD outlook.

Dollar Vulnerability, Technical Patterns, and Disinflation Narrative Influence EUR/USD Outlook

Dollar weakness has been the primary catalyst behind the recent rally in the EUR/USD pair. The Dollar Index (DXY) broke below the significant psychological level of 100.00, a level not seen since April 2022. This downward pressure on the US dollar has resulted in the Euro’s strength and pushed the pair to multi-month highs around the 1.1245 mark. The performance of the Dollar Index reflects the strong influence of the disinflation narrative on the currency, which has contributed to the selloff witnessed in recent days.

As the market focuses on the upcoming July Federal Open Market Committee (FOMC) meeting, the decisions and policy outlook of the Federal Reserve take center stage. There is anticipation of a potential 25 basis point rate hike at the meeting. While some expect the Fed to continue its hiking cycle, attention will be on the size of the hike and any signals indicating a pause or slowdown in future rate increases. Federal Reserve Chair Jerome Powell has already hinted at a more cautious approach as the Fed nears its goals. Market participants, however, remain skeptical about rate hikes beyond the July meeting, and the dollar is expected to be highly sensitive to lackluster economic data releases.

The focus on the US dollar’s trajectory has shifted to the concept of a potential “soft landing.” This term, which previously unsettled market participants, has now become a topic of discussion. As the July FOMC meeting approaches, the outlook for the US dollar remains uncertain, creating interesting times not only for the currency but also for global markets as a whole.

Looking ahead, several risk events are on the horizon, shaping the outlook for the EUR/USD pair. The preliminary release of the Michigan Consumer Sentiment Index has the potential to introduce volatility to the US dollar. While upcoming US retail sales and preliminary building permit data are scheduled for the following week, their impact on the US dollar’s outlook seems limited. Consequently, the Dollar Index could experience a bumpy ride leading up to the FOMC meeting as traders react to incoming data and adjust their positions accordingly.

From a technical perspective, the EUR/USD pair is trading at levels last seen in February 2022, indicating its strong upward momentum. While a slight pullback from the highs has been observed as the US session approaches, the Relative Strength Index (RSI) suggests that the pair is currently in overbought territory, implying a potential retracement. Key support lies around the 1.1200 level, and a daily and weekly candle close above this level would reinforce bullish sentiment for the upcoming week. Additionally, the moving averages (MAs) on the weekly chart are aligning for a golden cross pattern, typically signaling a continuation of the uptrend. While some technical indicators offer mixed signals, the prevailing trend favors further strength in the EUR/USD pair.

In terms of key levels to monitor, support levels can be found at 1.1130, 1.1092, and 1.1000, while resistance levels lie at 1.1250, 1.1300, and 1.1400. It is noteworthy that retail traders are currently positioned short on EUR/USD, with 76% of traders holding short positions according to IG Client Sentiment data. Contrarian analysis suggests the possibility of a short pullback before the pair potentially continues its ascent toward the 1.1400 handle.

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Conclusion

In conclusion, the EUR/USD pair has been capitalizing on dollar weakness and displaying strong upward momentum, reaching multi-month highs. As market participants navigate the intricacies of the current landscape, factors such as dollar vulnerability, technical patterns, and the prevailing disinflation narrative will significantly influence the pair’s outlook. With the upcoming FOMC meeting and a range of risk events on the horizon, the EUR/USD pair remains poised for further upside potential. Traders and investors should closely monitor key levels and technical indicators to capitalize on potential opportunities in the dynamic EUR/USD market.

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