EUR/USD strengthens as optimism grows for international trade deals

• The euro remains strong as hopes for trade normalization keep the US dollar low.
• German retail sales figures were disappointing, defying May’s expectations.
• The EUR/USD maintains an upward trend at 1.1750, capturing the attention of bulls.

The EUR/USD pair traded in a sideways manner on Monday, remaining close to the multi-year high of 1.1750 reached last week. The news about advancement in US trade talks with various partners fuels optimism about possible major trade agreements, which seems to encourage a mild risk appetite while keeping the US dollar somewhat low as a safe haven.

On Friday, U.S. Treasury Secretary Scott Bescent noted that the US and China finalized an agreement a few weeks back to resolve issues concerning rare earth imports, thus normalizing relations between these two key global economies.

In a separate matter, Canada announced last Friday the cancellation of its digital services tax, which had previously frozen trade discussions with the US, clearing a path for negotiations to resume.

Meanwhile, Japanese officials confirmed that their chief negotiator, Ryosei Akazawa, will stay in the US to continue discussions. Treasury Secretary Bescent hinted that negotiations could extend until US Labor Day on September 1st, which may provide additional opportunities to secure key contracts and thus boost investor confidence regarding global trade normalization.

In the US, an impending tax bill is expected to increase US debt by over $3 trillion over the next decade. Concerns regarding this debt crisis add pressure on the US dollar.

Across Europe, disappointing German retail sales data, which saw an unexpected decline, raises concerns about diminishing economic momentum within the major economies of the region. Later today, speeches from key German officials on the Consumer Price Index (CPI) for June are expected, which should offer more insights into the situation. The upcoming highlight of the week will be the US Non-farm payroll figures set to be released this Thursday, just before the Independence Day holiday in the United States.

Daily Digest Market Mover: Trade Optimism Keeps US Dollar on the Back Foot

• The US dollar has dropped against most currencies as the US dollar index stays stable at levels not seen since 2022. Recent trade agreements with China have resolved key rare earth issues and negotiations with Canada are looking to resume. The extension of the September deadline also raises investor confidence, favoring risk-sensitive currencies and undermining the safe-haven status of the USD.
• In Europe, a surprising 1.6% drop in German retail sales, against expectations of a 0.5% increase in May, puts a damper on the euro rally. Still, the common currency has retained a generally positive tone following a roughly 2% rise last week.
• Italy’s Consumer Price Index (CPI) increased by 0.2% in June, though this was less than the 0.3% growth analysts had anticipated. Annual inflation remained steady at 1.7%, slightly below forecasts for 1.8%.
• Germany’s preliminary consumer price figures for June are expected to show a 0.2% increase, with a 2.2% rate of inflation.
• The US market was quiet on Monday, with only the speeches from Bostic and Goldsbee noted. Analysts are leaning towards a September interest rate cut, and their comments will be closely monitored for confirmation.
• Last Friday’s Personal Consumption Expenditures (PCE) index in the US indicated higher-than-expected price pressures. The headline indexes rose by 0.1% monthly and 2.3% year-on-year, while core inflation increased by 0.2%, reaching 2.7%, which was above the forecasts.
• This data supports hopes for potential Federal Reserve rate cuts in the upcoming months. The CME Group’s FED Watch Tool now shows a mere 20% chance of a rate decrease in July, with a 90% likelihood of at least a 25 basis points reduction in September—up from over 60% just two weeks ago.

EUR/USD Resistance at 1.1750 is Critical for Bulls

After last week’s notable rally, the bullish trend remains intact. The pair continues to consolidate, with the 4-hour relative strength index pulling back from overbought territory, keeping the price action below nearly 1.1750 within a 70 pip range.

Immediate resistance exists at 1.1745 based on movements from June 26th and 27th. Beyond this, the next target could be the 161.8% Fibonacci expansion level at around 1.1795.

On the downside, support is noted at a low of 1.1680 from June 27th. If the price dips below this, support may be found in the previous resistance levels between 1.1630 and 1.1640 from June 12th and the 24th.

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