EUR/USD on the cusp of a bearish breakout ahead of US PCE data

The EUR/USD is on track for the second consecutive weekly gain as a dovish Federal Reserve drags the US dollar. The pair has jumped to 1.2195, which is 14% above the lowest level since March 2020.

Dovish Federal Reserve

The American economy is firing on all cylinders as evidenced by the recent economic data. The number of Americans filing for jobless claims has dropped to the lowest level since the pandemic started while the number of vacancies has soared. This is evidence that the labour market is tightening.

At the same time, the housing market is as hot as ever. Earlier this week, data showed that home prices rose by 13.2% in April, the highest level since 2005. Further, data published last week revealed that the services and manufacturing sectors are doing well.

Two weeks ago, the US also published strong consumer and producer price index data. However, the US dollar has struggled because the Fed has warned that the ongoing trend is temporary and that it won’t change its policy.

The EUR/USD is reacting to the relatively strong business and consumer sentiment data in the Eurozone. According to the European Commission, the bloc’s services sentiment rose from 2.2 in April to 11.3 in May. In the same period, the industrial sentiment rose from 10.9 to 11.5 as companies cheered the rising demand and the vaccine rollout. The consumer confidence improved from -8.1 to -5.1.

The EUR/USD also reacted to the strong German import price index data. The import price rose from 6.9% in March to 10.3% in April on a year-on-year basis. These strong numbers have pushed some analysts to consider that the European Union will move faster than the Federal Reserve. Later on, the EUR/USD will react to the latest US personal consumption expenditure (PCE) data.

EUR/USD analysis

The four-hour chart shows that the EUR/USD pair has been on an upward trend in the past few months. The pair has also formed an ascending channel that is shown in purple. It is also at the same level as the 25-day and 50-day exponential moving averages. Notably, the pair seems to be forming a bearish flag pattern.

Therefore, while it is too early to tell, there is a possibility that the pair will soon have a bearish breakout. If this happens, the pair will likely fall to the support at 1.2150 in the near term.