EUR/USD, AUD/USD outlook: Forex Friday

• EUR/USD, AUD/USD outlook: Weakening US data should keep USD undermined
• AUD/USD outlook supported by rallying Chinese markets – can we see onset of another rally from key 0.6650 key support level?
• Week ahead: CPI from UK and Canada, RBNZ rate decision and Global PMIs

Welcome to another edition of Forex Friday, a weekly report in which we highlight selected currency themes. In this week’s report, we will discuss the US dollar, euro and Aussie, and look ahead to the next week. Our EUR/USD and AUD/USD outlook remains bullish.

AUD/USD outlook video and insights on precious metals 

EUR/USD outlook: Dollar extends recovery – for now

After the mid-week volatility, FX markets have been far calmer in the last day and a half, with the dollar extending its recovery that begun on Thursday. The economic calendar is quiet today and will remain that way on Monday. We have a few macro events in the week ahead including CPI data from the UK and Canada, a rate decision by the RBNZ, as well as global PMI data which should be important for the EUR/USD in particular. But from the US, there are only a handful of data releases next week to offer direct influence on the greenback, plus some Fed speak. The key US data comes out on the final day of the month when core PCE is released, a week before the May jobs report comes out. Until then, I would expect to see some further dollar selling but at a more gradual pace. Our AUD/USD and EUR/USD outlook therefore remains bullish.

Before discussing the macro factors in greater detail, let’s quickly look at the EUR/USD chart.

EUR/USD outlook: Key levels to watch

The EUR/USD’s big breakout earlier in the week above the 1.0800 area has flipped the directional bias in bulls’ favour. The subsequent retreat we have seen in the last day and a half therefore is just a retracement of that rally. Unless we now go back below the breakout area of 1.0800 decisively, the path of least resistance remains to the upside. As such, I would expect the dip to be bought. Short-term resistance comes in around 1.0855, followed by 1.0885. Above these levels, 1.0900 and 1.1000 handle could be the next upside objectives.

Why has the dollar recovered, and can the gains hold?

Well, partly because of the lack of any major bearish catalysts either internally or externally, which has encouraged traders to book profit on their short dollar positions they had presumably opened earlier in the week. Thursday’s release of US data continued to point to an economic slowdown, although this was offset by a surprisingly large 0.9% m/m jump in import prices, which kept inflation worries high as rising import costs will only add to inflationary pressures.

The key question moving forward is whether investors will sell into this latest dollar recovery, and therefore buy the EUR/USD dip, given the recent signs of a cooling US economy? Or will worries that the Fed will push back rate cut expectations amid signs of sticky inflation keep the dollar supported? I think the former.

Much of the past hawkish repricing of US interest rates have already been factored into the markets, and the recent downturn in data is likely to apply disinflationary pressures on the economy. A rate cut in September looks likely and at least one more before the end of the year, possibly three.

AUD/USD outlook supported by rallying Chinese markets

Meanwhile the recent improvement overserved in European data in recent weeks should help the likes of the pound and euro, keeping the EUR/USD outlook positive. What’s the ongoing rally in Chinese equities market is a good sign for the positively correlating euro. The latest Chinese data released overnight was mixed. While industrial production was stronger, this was offset by disappointing retail sales. Additionally, new initiatives to support the beleaguered property market could not help the yuan either, although Chinese stocks did rally to a new 2024 high. The fact that we are continuing to see new 2024 highs in Chinese stocks, this goes to show sentiment towards China remains positive and that should be good news for commodities and commodity dollars like the AUD.

Watch out for a bullish breakout on the AUD/USD now that it has drifted back towards key support near 0.6650, which was a major resistance zone in the past. Can we see the onset of another rally here?

EUR/USD, AUD/USD outlook: Weakening US data should keep USD undermined

While the US dollar selling has stalled since Thursday, we have seen further evidence of an economic slowdown, adding to Wednesday’s disappointing macro pointers. It is becoming increasingly difficult to justify maintaining a bullish view on the…