EUR/USD returned some of the week’s losses on FridayThe move was modest though and the bears remain in chargeThis week’s news of German recession makes the ECB’s balancing act harder

The week’s big news was that Germany slipped into recession in 2023’s first quarter. It’s by far the Eurozone’s largest national economy, and usually among its most successful, so naturally this news has weighed on sentiment toward the single currency. Germany has had to deal with rising inflation and a reduction in its massive use of Russian energy, a consequence of the war in Ukraine.

The ‘USD‘ side of EUR/USD has been supported by rising hopes that Congress will come to heel and pass an increase in the Federal debt ceiling before the end of this month. Treasury Secretary Janet Yellen has warned that Washington will be out of cash by June 1 if it can’t.

A deal remains elusive but the markets are latching onto any signs of progress in the media.

Stronger US data has left markets with the clear impression that the Federal Reserve has leeway to increase interest rates again, should it wish to, without causing as much economic pain to its home economy as the European Central Bank would have to contemplate if it moves again.

The ECB has to deal with both weaker growth and much higher inflation, making its monetary balancing act a lot tougher.

On Friday consumer spending in the US was found to be resilient in the Personal Consumption and Expenditure data series, reportedly favored by the Fed as an economic barometer. Its core inflation gauge rose 4.7% on the year in April, having gained by 4.6% in March. Markets think there’s about a 40% chance that US rates will go higher again next month. Inflation numbers like this could see that probability rise, supporting the Dollar further.

EUR/USD Technical Analysis

The Euro is currently threatening to break down through a daily-chart trendline that has supported the market since late September last year. It provides support at 1.07172 on Friday and it looks as though the bulls will struggle to ensure a daily and weekly close above that level.

There has so far been a reluctance to push below psychological support at 1.0700. The market hasn’t been below there since the middle of March, but it is now very close and it will be fascinating to see whether that level can be defended through Friday’s US trading session.

It’s worth noting, however, that the trendline hasn’t seen a test since early November last year with all subsequent bearish slides toward it stopped well before it needed defending. It might be more immediately relevant that EUR/USD has fallen back into a trading band bounded by the highs of mid-March and the significant lows of March 15 and 8. These came in at 1.05245 and a retest of these could be key to avoiding further, deeper falls.

IG’s client sentiment indicator finds market views rather mixed, but with a clear bullish bias of 60%.

–By David Cottle for DailyFX

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