EURUSD broke the bear flag consolidative formation and extended a new leg to the downside last week. And while the overall bearish momentum is strong and the downtrend intact, further continuation lower at the same pace seems harder to come by going forward.

For instance, the daily RSI has hit oversold levels of around 30 again, which is accompanied by bullish divergence (see chart). While this is not a signal to go long, it does highlight the potential for some consolidation/retracement to happen. Additionally, EURUSD has also reached the lower trendline of the downward channel, suggesting technical support could help to attract some buyers here.

The nearest resistance to the upside is now located at the 1.05 zone, which was support till it broke. Above it, the focus remains on the 1.07 - 1.08 zone that should keep this downtrend intact. With EURUSD testing the lower end of the channel, while the RSI is oversold, a potentially sharp squeeze higher cannot be ruled out. Such a scenario could see this 1.07 - 1.08 resistance zone getting tested.

The other scenario is if EURUSD would fall to 1.00 (parity) from here without a notable consolidation first. In this case, a break below the support at the 1.0340 low would indicate this scenario is unfolding. An acceleration of the bearish price action could then see EURUSD quickly falling to the 1.00 area.

The upside surprise in CPI inflation last week unleashed a new wave of USD bullish momentum and eventually took the DXY dollar index to a fresh cycle high, touching the 105.00 level. A risk-off episode in global stock markets additionally helped to fuel USD strength, especially vs the risk-sensitive currencies (AUD, NZD, CAD). Interestingly, other safe-havens like the yen also benefited, which was an outperformer on this risk aversion episode after a prolonged period of weakness (more in the JPY section here).

Last Wednesday’s hot inflation print will keep the Fed on course to tighten policy aggressively in the coming months. Market pricing of future Fed hikes suggests at least two more 50bp rate increases in June and July will come, and possibly also in September (taking US interest rates to 2% in summer already and 2.5% by September). Adding to this quantitative tightening (QT), which should commence on June 1, the overall bullish underpinnings for the US dollar remain intact. A slight risk-off tone and a weakening Chinese economy due to Covid lockdowns are only acting as additional tailwinds for the strong dollar in this environment.

The US economic calendar is relatively quiet this week, with only the retail sales report in the main focus. Housing data will also be watched, as will the Empire State and Philly Fed manufacturing indexes, which are leading indicators for this sector of the economy.

Aside from a possible short-term consolidation, perhaps driven by technical factors or some weakness in this week’s economic data, the USD bull trend should remain intact.

With no good news on the war in Ukraine, the euro was pressed down again last week. The news that Russia has cut off part of the gas supplies to Germany again sparked fears that a full embargo is a real possibility. Such a scenario could see the EUR currency accelerating its slide broadly.

It seems that the euro needs a significant de-escalation with Russia before a notable recovery of recent losses can emerge. Unfortunately, such a scenario of either a de-escalation of the war in Ukraine or the Russia-West relations still looks highly unlikely. This is why the outlook for the EUR currency remains negative, while EURUSD looks poised to test the parity zone (1.00) or lower.

On this week’s calendar, traders will watch ECB speakers, including Chief economist Lane and President Lagarde. Still, despite their hawkish comments and the market expectations for almost three ECB rate hikes, the euro has failed to benefit so far.