The EUR/USD currency pair plunged 1.82% on Tuesday, to an intra-day low of 1.1135 dollars per euro, after Bloomberg reported that Goldman Sachs said quantitative easing in Europe will send the euro toward parity versus the greenback. The timing of Goldman’s comment, on the shift to policy divergence between the ECB and the U.S. Federal Reserve, could not have been more perfect as the EUR/USD was about to break out the 1.14 dollars per euro resistance level.

The strength in the U.S. dollar may also have been fueled by a comment on Tuesday, from Federal Reserve governor Jerome Powell to a Wall Street Journal reporter, saying that the central bank’s conditions for deciding when to begin interest rate increases could be met “as soon as September”. 

The EUR/USD broke out of the key head resistance last Wednesday, to close at 1.1338 dollars per euro, after the U.S. Federal Open Market Committee (FOMC) meeting, as the Fed sharply downgraded their economic forecast for this year to between 1.8% and 2%, from the previous forecast in March of between 2.3% to 2.7%. Fed Chair Janet Yellen, however, sounded hawkish at the conference as she said the rate hikes are coming. Ms. Yellen insisted the timing will be dependent on statistics in real time.

The Bureau of Labor Statistics, the U.S. Department of Labor, said last Thursday that the May Consumer Price Index (CPI) was unchanged from a year ago, in-line with Wall Street economists, according to Reuters. The core CPI for all items less food and energy rose by 1.7% in May over the last year, missing the forecast of 1.8% on a year-on-year basis. 

The currency market was confident that the Fed’s rate hike may be off the table for now as the CPI data came in weaker than expected. Despite the fact that the meeting of the EU finance ministers in Luxembourg last Thursday, failed to bridge the gap between Greece’s leftist government and its lenders, the U.S. dollar index sold-off, pushing the EUR/USD to an intra-day high of 1.1436 dollars per euro, before pulling back to close at 1.1368 dollars per euro last Thursday.

In fact, the Federal Reserve no longer emphasizes the CPI as its official 2.0% inflation target. Instead, it has adopted the personal consumption expenditures (PCE) index, particularly the core PCE with the volatile prices of food and energy stripped out. 

The Bureau of Economic Analysis (BEA), the U.S. Department of Commerce, will release the May personal income and outlays, including the PCE data, on June 25. The analysts at Bank of America Merrill Lynch expect the May core PCE price index, excluding food and energy, to increase 1.2% from a year ago, well below the Fed’s inflation target of 2.0%.

The Greek debt crisis is now in full-blown mode. Greece needs the funds to make a 1.5 billion euro repayment to the International Monetary Fund by June 30. Last Friday, the ECB approved an increase of 1.75 billion euro in emergency loans to keep Greece’s banking system afloat. 

Greece's government submitted new proposals to end the deadlock over its debt crisis on Sunday, ahead of another EU leaders emergency summit, scheduled for Thursday, June 25 in Brussels. This could be the last ditch attempt to save Greece from falling into a default. Some eurozone officials believe Greek Prime Minister Alexis Tsipras may strike a deal at the summit. 

As of June 16, there are 217,067 short positions of euro FX (CME:6E), traded on the Chicago Mercantile Exchange (CME), by asset manager/institutional and leveraged funds. This is compared to about 83,809 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. Net long positions have increased about 51,654 contracts since June 2, where euro FX contracts are traded in units of 125,000 euros.

From our technical viewpoint, the EUR/USD bounced off the short-term trendline support of the symmetrical triangle at 1.0818 dollars per euro. The EUR/USD broke out the symmetrical triangle at 1.122 dollars per euro and the technical head resistance of 1.14 dollars per euro before pulling back to close at 1.1368 dollars per euro last Thursday. 

The projected conservative target for a breakout event is 1.237 dollars per euro, determined by adding the width at the top of the pattern to the point of breakout. If the currency pair breaks out the 1.14 dollars per euro level, the next head resistances are between 1.155 and 1.16 dollars per euro. 

Comments from Goldman Sachs and the Fed’s Powell just sent the EUR/USD back to retest the 1.12 dollars per euro level, or 61.8% Fibonacci retracement. If the euro continues to fall, the next support for EUR/USD is at the 1.106 dollars per euro level.

The downside risks for the U.S. dollar would increase substantially if the core PCE comes in below expectations, as the Fed may not be able to hike interest rates anytime soon. The final reading of the first quarter U.S. GDP and the May personal income and outlays, including the PCE data, will be released on June 24 and June 25, respectively. There could be a dollar sell-off if Greece strikes a deal at the summit.