EUR/USD pair is showing signs of further decline below 1.0700

The EUR/USD pair is showing signs of further decline below the 1.0700 level as the trading week comes to a close. Examining the daily chart, we observe that the pair has experienced a downward trend for the third consecutive day, extending its overall decline. Notably, the EUR/USD pair reached a fresh two-month low of 1.0760 on Thursday, and it is currently trading around the 1.0720 price level, indicating a subdued sentiment leading up to the end of the trading day.

The strength of the Greenback remained prominent on Thursday, as the market sentiment remained negative due to the ongoing uncertainty surrounding a potential extension of the United States' debt-ceiling. House Speaker Kevin McCarthy provided an update on the discussions during American trading hours, noting that a deal has not yet been reached. Nevertheless, McCarthy emphasized that the country would not default. The disagreements between Republicans and the government primarily revolve around spending, with the opposition advocating for spending cuts rather than tax hikes.

Turning to the latest economic data, Germany reported a downward revision of its Q1 Gross Domestic Product (GDP), which now stands at -0.3% quarter-on-quarter. This news added further pressure on the Euro. Conversely, the US data provided some support to the USD, leading up to the opening of Wall Street. The US Q1 GDP was upwardly revised to an annualized growth rate of 1.3%. Additionally, the Initial Jobless Claims for the week ending May 19 surpassed expectations, declining to 229K. Furthermore, the April Chicago Fed National Activity Index rose from -0.37 to 0.07, indicating an improvement in economic activity. However, Pending Home Sales experienced a decline of 20.3% in April, which was better than the anticipated 22.5% decline.

Looking ahead to Friday, there are no significant macroeconomic data releases expected from the European Union (EU). However, the United States is set to publish several notable figures, including April Durable Goods Orders and the Personal Consumption Expenditures Price Index for the same month. Based on our analysis, we anticipate a continuation of the bearish trend, particularly after observing the price reacting at the 38.2% Fibonacci continuation retracement level.

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EUR/USD is recovering from a recent decline that brought it to its lowest level in over two months near 1.0700. The short-term technical outlook remains uncertain, with the next move dependent on the upcoming US Personal Consumption Expenditures (PCE) Price Index data.

Positive US macroeconomic releases, including a revised first-quarter GDP growth of 1.3% and better-than-expected weekly Initial Jobless Claims at 229,000, have raised expectations for a potential Federal Reserve (Fed) rate hike in June, boosting the US Dollar (USD).

The forecast for the annual Core PCE Price Index, which is the Fed's preferred measure of inflation, suggests a 4.6% increase in April, matching the March figure. Monthly core PCE inflation is expected to remain stable at 0.3%. If the monthly reading exceeds or equals 0.5%, it could further support the case for a Fed rate hike and strengthen the USD. Conversely, a softer-than-expected number would limit USD gains and potentially extend the rebound for EUR/USD.

According to the CME Group FedWatch Tool, the probability of the Fed maintaining its policy rate unchanged in June has dropped below 60% from around 80% earlier in the week. Market positioning indicates a two-way risk for EUR/USD based on the upcoming PCE inflation data.

Technically, the pair remains in a ranging zone, and our bias continues to be bearish in line with the overall downtrend.

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