EUR/USD: Bulls in control, focus on German and US GDP

• EUR/USD’s bias remains bullish, but RSI signals overbought conditions. 
• A pullback may be seen if the German Q2 GDP shows bigger-than-expected contraction. 

While the path of least resistance for EUR/USD is on the higher side, the currency pair looks overbought and may suffer a pullback if Germany reports a bigger-than expected economic contraction in the second quarter on Thursday. 

Wednesday’s gain restored bull bias

The pair jumped 0.65% on Wednesday as the Federal Reserve expressed concerns regarding the health of the US labor market and sounded dovish on interest rates. 

Wednesday’s rise invalidated buyer exhaustion signaled by Tuesday’s inside day candle and restored the immediate bullish bias. 

That said, the 14-day relative strength index is reporting overbought conditions with an above-70 print for the tenth straight day. As such, a minor pullback cannot be ruled out. 

Focus on German data

Germany’s preliminary gross domestic product (GDP) reading for the second quarter is expected to show the economy contracted by 11.1% year-on-year in April to June period, following the first quarter’s 2.3% contraction. The quarter-on-quarter growth rate is seen falling to -10.9% from 1.9%. 

GDP is a backward-looking data and seldom creates big moves in the market. Besides, euro’s recent rally is reflective of the market’s positive outlook for the third quarter. Indeed, consumption in France and Germany has rebounded to pre-crisis levels, as noted by BK Asset Management’s Kathy Lien. 

As such, one may consider the GDP a non-event. However, as noted earlier, the pair is looking overbought. In such situations, even a backward-looking dismal data elicits a negative reaction. In other words, EUR/USD may face some selling pressure if the German GDP shows a bigger-than-expected contraction. 

However, the downside looks limited with markets focused on renewed concerns regarding the future course of the US economy. The greenback will likely experience another wave of selling if the US second-quarter GDP, scheduled for release at 12:30 GMT, prints below estimates, validating Federal Reserve’s dovish stance. The Fed kept interest rates unchanged on Wednesday and said that the pace of recovery has slowed with the resurgence of coronavirus cases. 

At press time, EUR/USD is trading in the red near 1.1777, having put in a 22-month high of 1.1807 on Wednesday. 

Technical levels