EUR/USD forecast: Dollar holds the upper hand as traders await Fed minutes

• EUR/USD remains slightly under pressure as the US dollar finds mild support ahead of the FOMC minutes
• Firmer oil prices and volatility in technology stocks reinforce demand for safe-haven dollar
• German industrial production jumps but fails to offer euro much support

 

The EUR/USD forecast remains tilted slightly to the downside as the dollar continues to attract buyers in what has been a relatively quiet start to the week. With little in the way of fresh economic catalysts, investors are focusing on central bank expectations, oil prices, some volatility in the technology sector and broader risk sentiment. While the euro has managed to hold above the 1.1400 mark, it is struggling to generate meaningful upside momentum as markets increasingly favour the US dollar for now.

 

Markets settle into wait-and-see mode

 

Currency markets have entered a period of consolidation following last week’s US employment report. Although payroll data was softer than expected, it failed to significantly alter expectations for Federal Reserve policy. Investors appear comfortable maintaining long-dollar positions while waiting for clearer signals from policymakers.

 

Monday’s US ISM Services PMI came in largely as expected at 54.0, reinforcing the narrative that the US economy continues to expand at a healthy pace without generating fresh inflation surprises. Meanwhile, Fed Governor Christopher Waller largely reiterated familiar views, suggesting inflation risks remain skewed to the upside while questioning whether excessive forward guidance benefits markets.

 

With today’s US calendar offering few major data releases, attention is already shifting towards Wednesday’s publication of the FOMC meeting minutes. Any indication in the minutes that policymakers were open to the idea of policy tightening in the coming months could keep the dollar supported.

 

Away from economic data, it is worth keeping an eye on crude oil prices which have extended their recovery for the fourth day, as tensions around the Strait of Hormuz continue to simmer following reports of missile attacks involving commercial vessels. Although energy prices have dropped massively from their conflict-driven highs, lingering supply concerns continue to support crude prices around $70 and, by extension, the defensive appeal of the US dollar.

 

Euro struggles to find fresh drivers

 

The euro’s outlook is becoming increasingly mixed. Today’s publication of German industrial production figures offered an encouraging surprise, with output rising 0.9% in May, helped by stronger automotive manufacturing and construction activity. The resilience suggests Europe’s industrial sector has so far weathered recent geopolitical disruptions better than many had feared.

 

However, stronger industrial data alone will not be enough to shift monetary policy expectations decisively. Markets continue to debate whether the European Central Bank will need to tighten policy further later this year, with a September rate increase no longer viewed as the most likely outcome.

 

That said, ECB officials are unlikely to declare victory over inflation just yet. Core price pressures remain elevated enough to warrant a cautious tone, and speeches from senior policymakers this week could reinforce the message that the inflation battle is not yet complete. While that may offer occasional support to the single currency, it is unlikely to outweigh the broader strength currently underpinning the dollar.

 

EUR/USD forecast: Technical outlook points to further consolidation

 

From a technical analysis perspective, the EUR/USD forecast is pointing towards continued consolidation. The pair was holding above the 1.1410 support area at the time of writing, but should this region give way then that would expose the 1.1300 area for a potential test.

 

 

On the upside, 1.1450-1.1470 remains an important resistance area on EUR/USD. Above that 1.1500 handle is the next level to watch ahead of 1.1575 thereafter.

 

For now, any meaningful upside in the EUR/USD exchange rate would likely require a clear shift in Fed expectations or a significant deterioration in US economic data, neither of which appears imminent. Thus, markets seem comfortable rewarding the higher US yield advantage while volatility remains subdued.

 

Overall, the EUR/USD forecast continues to favour modest dollar strength over the near term. Unless the upcoming FOMC minutes deliver an unexpectedly dovish message or ECB officials surprise with a more aggressive stance, the pair may remain confined to the lower end of its recent trading range, with sellers likely to emerge on any short term rallies or recovery attempts.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R