EUR/USD holds strong ahead of key ECB meeting

The euro asserted its dominance in Tuesday’s European session, surging past the 1.0900 mark against a faltering US dollar ahead of a key ECB meeting on June 6 – that will give monetary policy direction. Analysts attribute this robust ascent to a notable downturn in the greenback following the release of lacklustre US economic indicators.

Why is the USD weakening?

The US Dollar Index (DXY) has plummeted to a near two-month low, primarily due to the disappointing May ISM Manufacturing PMI report. This report reveals a second consecutive month of contraction in the manufacturing sector, with the PMI down 0.5 percentage point from the 49.2 percent recorded in April. This decline is raising concerns about a possible economic slowdown and a potential easing of inflationary pressures. These worries are further exacerbated by the recent downward revision of Q1 GDP growth.

This economic slowdown could bring back talk of earlier-than-expected interest rate cuts by the Federal Reserve, according to analysts. Traders are now eagerly anticipating upcoming economic data releases, such as the ISM Services PMI, ADP Employment Change, and Nonfarm Payrolls, which will be crucial in either validating or refuting these expectations.

While the market absorbs these developments, the euro stands strong, showcasing its resilience and potential for continued appreciation against a weakened US dollar.

EUR/USD technical analysis: Will prices rebound or keep sliding?

At the time of writing, analysts note that EUR/USD has seen a brief retracement — currently hovering around 1.086. Prices are presently touching the upper boundary of the Bollinger band, which is an indicator of overbought conditions — hinting at a possible significant retracement.  

The 14-period Relative Strength Index (RSI) edging up at around 64 suggests that some bullish pressure exists. If the retracement materialises, we could see a slide towards the 1.080 mark. Sellers could find some difficulty pushing through the 1.084 mark, an area that has held sellers before.

If upside pressure resumes, bulls could face resistance around the 1.088 mark, an area sellers have defended before. A decisive breach past that price point could see the price resume earlier highs of 1.091.

Conclusion

The euro is capitalising on a weakened US dollar, driven by lacklustre economic data and expectations of an earlier Federal Reserve rate cut. However, the recent retracement in EUR/USD and overbought technical indicators suggest a possible consolidation or pullback before further gains, according to analysts. Traders should closely monitor upcoming economic releases, as they will be pivotal in determining the pair’s future direction.

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