EUR/USD weekly forecast: How sentiment shifts and outlook considerations impact trading strategies

Following a notable decline that tested the 1.06500 threshold at the outset of May, the EUR/USD initiated a remarkable reversal, attracting buyers and propelling into a robust upward trajectory that persisted through late Thursday and extended into Friday.

This surge in the EUR/USD, culminating in a higher closing level for the week compared to its initial value, signifies a promising development for bullish traders within the currency pair. The closing figures achieved by the EUR/USD last week hadn't been witnessed since the second week of April, albeit during a period when the pair was ensnared in a downtrend. Notably, it's been since April 2nd that the EUR/USD has attained its current ratio amidst an ongoing upward ascent.

Current short-term anxiety in the EUR/USD market

The Forex market, encompassing currencies like the EUR/USD, has evolved into a complex and challenging arena for traders over recent months. However, the unveiling of last week's U.S. economic data potentially marks a pivotal juncture in the perspectives of financial institutions.

With Gross Domestic Product figures falling below expectations, concerns over waning growth in the U.S. economy have surfaced, fostering hopes among traders that this trend could eventually alleviate inflationary pressures.

Moreover, the disappointing U.S. Non-Farm Employment Change data further underscored the uncertainties surrounding the economic landscape. Although inflation remains a top priority for the U.S. Federal Reserve, the earnings report on Friday fell slightly short of predictions, exacerbating concerns over escalating prices. The Federal Reserve's apprehension regarding the future trajectory of inflation was articulated during Wednesday's remarks, emphasizing the prevailing uncertainty.

In a potentially mitigating development, WTI Crude Oil prices experienced a downturn last week, offering a glimmer of hope in the battle against inflation. However, the transition from short-term speculative fluctuations to enduring trends has yet to materialize, tempering optimism.

Nevertheless, EUR/USD traders demonstrated resilience and confidence as they seized the opportunity to acquire the currency pair amid speculations of improved valuations. Despite this flurry of activity, lingering nervousness persisted, evident in the inability of the EUR/USD to maintain its elevated levels as Friday drew to a close. Anticipation mounts for the week ahead, with expectations of continued volatility and the possibility of a wide price range in the market.

Factors affecting the EUR/USD

Last week, German inflation figures fell slightly short of expectations, signaling potentially positive implications for the European Union. However, this outcome failed to trigger a significant surge in EUR/USD buying activity.

The European Central Bank (ECB) is scheduled to convene for a virtual meeting this week, albeit without any monetary policy decisions; those are reserved for June. While closing the week above the 1.07500 threshold may be viewed favourably, the pressing question remains: can the currency pair maintain its current position and upward trajectory?

There's a growing speculation among financial institutions that the worst of the economic downturn in the U.S. has passed, leading to anticipation that the Federal Reserve may adopt a more dovish stance. However, this anticipation is met with skepticism, especially in light of last week's inflation data from the U.S., suggesting that betting on a shift in the Fed's direction remains speculative at best.

Weekly outlook

The EUR/USD exhibited an intriguing ascent last week, briefly surpassing the 1.08000 milestone on Friday. However, the failure to sustain these higher levels is likely to unsettle some traders as they prepare for the market opening tomorrow. A sustained opening above the 1.07550 mark for the EUR/USD would be perceived positively, providing reassurance to market participants.

Additionally, traders should take note that British banks will be closed tomorrow for their May holiday, leading to lower trading volumes within the EUR/USD at the outset of the day. This reduced activity may contribute to continued volatility into Tuesday. Furthermore, Wednesday will see several European nations observing a holiday, potentially further impacting trading dynamics.

While last week's higher close brought some encouragement for the EUR/USD, the persistent choppiness in the currency pair over the past few months serves as a reminder of the prevailing uncertainty. Consequently, market outlooks remain clouded, and trading could continue to be speculative, lacking a clear trend.