EUR/USD extends gains on weaker US dollar

The EUR/USD pair’s main trend is bearish but a firm recovery above 1.0650 could point to an interim bottom as the US dollar drops further amid an improvement in market sentiment.

The EUR/USD has been surging since early European session and recently printed a fresh daily high at 1.0598. It remains near the daily high, on its way to the highest daily close in two weeks and the first one above the 20-day SMA since early April.

Economic data from the US was mostly ignored by market participants on Thursdays. Initial Jobless Claims rose to 218K, the highest level since January, while Continuing Claims hit the lowest since 1970. The Philly Fed tumbled to 2.6 in May versus market consensus of 16. Existing Home Sales fell 2.4% in April.

The dollar’s weakness was driver initially by lower US bond yields and, more recently, by the improvement in market sentiment. While European bonds remain relatively steady, Treasuries are higher. The US 10-year yield went from above 3% on Wednesday to 2.81% on Thursday.

The US dollar was falling on Thursday and during the American session accelerated the decline as stock markets started to offer signs of life. The Dow Jones is falling “just” 0.26%, while the S&P 500 and the Nasdaq are up by 0.33% and 1.20%, respectively.

Earlier, the European Central Bank released the minutes of its last meeting. Board members widely expressed concerns over high inflation. “The European Central Bank hawks are calling the shots. The minutes of the ECB’s April meeting just confirmed that the hawks increasingly have the upper hand in discussions. A rate hike in July is no longer uncertain, the only uncertainty is whether it will be 25bp or 50bp”, said Carsten Brzeski, Global Head of Macro at ING.

The outlook for the EUR/USD is improving even with the current environment of volatility and cautious markets. If the pair manages to remain above 1.0600, it could add support for a more sustainable recovery. The next target is seen at May’s high at 1.0641. Above the next strong barrier awaits at 1.0750.

A slide back under 1.0545 (20-day Simple Moving Average) would alleviate the bullish momentum. Below, attention would turn to 1.0480 and then 1.0455 (May 18 and 19 low).