Chart of the day - EURUSD (04.07.2024)

With the weakest ISM reading from the U.S. services sector in 4 years, which caused a sell-off in the US dollar and a drop in U.S. Treasury bond yields, and the ECB minutes scheduled for today (12:30 PM BST), it would be hard not to pay attention to the EURUSD pair today. The U.S. economy seems to be slowly entering a cooling phase, which could gain momentum, introducing more volatility and potentially 'plotting' a further trend on the Eurodollar.

• An acceleration in the growth rate of the US economy from current levels would undoubtedly be a major surprise, which, while not impossible, is priced in with diminishing probability. As a result, the hitherto sizable gap between the economies on both sides of the Atlantic is beginning to narrow, which could support the EURUSD
• Yesterday's ISM services from the US indicated a large drop in the components of orders and employment; the price index also fell (although it is still at levels nearly 8 points higher than the ISM PMI, which indicated 48.8). At the same time, data released today from Germany indicated an unexpected -1.6% decline in factory orders, while investors had expected a 0.5% increase after a -0.2% decline previously. 
• Admittedly, it is difficult to interpret the strength of both economies using only a few, selective data, but we are able to imagine that if the U.S. economy begins to slow at a pace more or less similar to the slowdown in Europe, the sheer difference between the two economies' bond yields will begin to put some upward pressure on the EURUSD over time. Some signs of a return of buyers on the EURUSD are already being observed.
• Yesterday's minutes of the Fed's June meeting indicated that bankers see a gradual cooling of the U.S. economy, and indicated in June that they need more data to reassure them about a sustained decline in inflation toward 2%. Yesterday's weaker ISM services reading was seen by markets as a significant indicator that the Fed may gain enough confidence not to delay and cut rates in the fall
• Today's ECB minutes are unlikely to radically change the current picture of the bank's stance. However, more dovish comments may reassure the market that the scale and pace of monetary easing in the eurozone may be greater than bank members had assumed back in June. In the spring, there was a consesus of a gentle rebound in Europe's economies in the second half of the year - but it still looks decidedly vague; Europe's economy may not fall into recession, but consolidate in a sideways trend, without much change in either direction. Such a scenario, with a slowdown in the US also likely to support EURUSD.

EURUSD chart (D1 interval)

Looking at the chart, we can see that the pair is trading in an upward pennant formation, and has reached the 200-session simple moving average SMA200 (red colour). A renewed rise above 1.08 could pave the way for EURUSD to reach important levels at 1.09 and 1.10. Along the way, an important resistance level could also appear near 1.085, where we see the 23.6 Fibonacci retracement of the 2022 upward wave and previous price reactions. The pair is trading higher and higher lows, suggesting a possible breakout from the formation. In a scenario that would negate an upward breakout, a test of the 1.07 level could suggest a drop to 1.06 and a potential reversal to a downtrend. Such a scenario could be supported by a series of very weak data from Europe. As we can see on the volume, since a few sessions buyers are dominating sellers on the pair.

Source: xStation5