The EUR/USD exchange rate turned away from 10-month highs last week, leaving expectations hanging in the balance which means it may be lucky if it manages to avoid further declines over the coming days. For three consecutive trading sessions, the price of the EUR/USD currency pair has been moving amid a bearish correction, and breaching the 1.0700 support level will contribute to a bearish trend.
In general, the single European currency - the euro - fell on Friday, as US bond yields rose and futures contracts revised the US federal funds rate to point to a move to 5% and beyond after the rise in January in the US non-farm payroll report. This seemed to undermine the possibility of an imminent pause in the Fed interest rate cycle.
“This reflects labor tightness as well as scope for more supply shocks,” says Jane Foley, forex analyst at Rabobank.
The risk this week is that Fed officials are preparing the market to ramp up estimates and predictions in March of how interest rates will eventually rise so they can be confident inflation will return to its 2% target as they make their way around the world on the speaking circuit.
Just last week, Fed Chairman Jerome Powell said at the February press conference that smaller quarter-percent increases in the federal funds rate may be all that is needed to see inflation return, and wage growth continued to soften in the latest payroll report. A softening of wage growth could mean that inflation could return to target even as unemployment remains at historically low levels, which would negate the need for higher interest rates, although it all depends on how FOMC members view the issue.
Euro Could Be Insulated
While an extended US dollar rally is likely to weigh on all currencies, the euro could be somewhat insulated from this given the interest rate forecasts the European Central Bank outlined last week. More so if ECB officials are in the same speaker circle this week. obligated while abroad.
And the ECB has been firm in stressing that continental interest rates will certainly rise further in March and are likely to rise again in the following months, albeit in unspecified increments. For her part, President Christine Lagarde said last Thursday: “We are definitely not there now, and we will not be in March, given that we will depend on the basic indicators of inflation and the pressures that we see very clearly at the present time.”
What happens next, as I said earlier, will be a factor in how much ground we need to cover, and there will probably be a floor to cover, but it will depend on the data.” Among the speakers set to appear publicly this week is Austrian Central Bank President Robert Holzmann, who is known to be among the most hawkish on the ECB's Governing Council although his speech at the Hungarian National Bank is bookended by appearances by several Fed officials.
EUR/USD Forecast
According to the performance on the daily time frame chart below, the EUR/USD currency pair is in the process of breaking the general trend that was bullish before the last Thursday and Friday sessions. It jumped to the 1.1032 resistance level, its highest in nine months. Its recent losses were amid strong selling operations on the cusp of the 1.0700 support, which is the beginning of the trend turning bearish, and this transformation will strengthen if the euro/dollar moves toward the support levels of 1.0645 and 1.0490, respectively.
On the other hand, and for the same period of time, if the bulls return in the euro/dollar currency pair towards the resistance level of 1.0920, the bullish outlook for the currency pair will return again. The Eurodollar will be affected by new statements from US Central Bank Governor Jerome Powell.
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