- During trading in the middle of this week, the price of the euro currency pair moved against the dollar, EUR/USD, towards the 1.1095 resistance level, the highest for the most famous currency pair in the forex market in a year.
- It settled around the 1.1030 level at the time of writing the analysis.
- The EUR/USD pair rose by more than 1 percent amid more stable global investor sentiment, with the previous day's concerns about the US banking sector fading quickly.
Commenting on the performance and factors, Joe Manimbo, Senior Forex Analyst at Convera, said that: “Cautious calm has returned to the markets.”
“The euro and the pound sterling rose back into positive territory for this week, with the former within striking distance of recent year highs,” he added.
The US dollar rose against the British pound, the euro, and other major currencies only 24 hours ago amid a broad decline in global stocks as investors interacted with new concerns about the US banking sector. Middle-tier lender First Republic Bank said it suffered $100 billion in deposit outflows during the first quarter as banking sector concerns grew following the collapse of Silicon Valley and Signature Bank.
First Republic Bank remains afloat and there are no signs of stress elsewhere in the sector, meaning concerns are waning at the time of writing. The US dollar was softer as investors reacted to US data showing further signs of slowing: The durable goods report showed demand for non-defense capital goods fell 0.4% in March, after a downwardly revised 0.7% decline in February.
For his part, Kieran Clancy, chief US economist at Pantheon Macroeconomics, said that: “We believe that the largest declines in orders will come over the next few months as credit conditions continue to tighten.”
The possibility of a recession in the United States in the second half of the year increases and with it the possibility of cutting interest rates in the US Federal Reserve, all of which combine to undermine the dollar. The euro continues to outperform as investors anticipate that the European Central Bank (ECB) still has a long way to go in further rate hikes. The single European currency - the euro - is gaining those central bank currencies that have either paused (Australian and Canadian dollars) or are about to pause (US dollars).
The gains are less impressive against those central banks that didn't raise rates further, but less so against the European Central Bank (GBP).
“The fact that the Swiss franc and the euro are leading the pack suggests instead that old-school central bank relative hawks’ concerns are the real drivers within the G10 space,” said Shihab Galinos, head of forex research at Credit Suisse.
Credit Suisse is targeting the EUR/USD at 1.1250 by the end of Q2, “but expect a slow to this level given the positioning and interest rate divergence story only tepid at this point.”
For his part, Daraj Maher, Head of Research for the Americas at HSBC, said that “For the US dollar, the downtrend since the beginning of March has remained in place, but has become more bearish than meaningful.” And “the euro continues to take advantage of the possibility, however slim it may be. And a 50 basis point hike next week at the European Central Bank.”
The near-term risk to the upside for the euro and the dollar is indeed the ECB meeting next week and any rally of less than 50 basis points could undermine the euro. The entire market is invested in the ECB's hawks, so any hints that it is ready to soften this stance could lead to a rapid repricing in expectations that could deflate the Euro's sail. But Eurozone data will need to take a material turn for the worse before this result materializes, especially as the economy continues to surprise: the latest April consumer confidence data for Germany and France came in higher than expected. Inflation is well ahead of the ECB's 2.0% target and is unlikely to turn materially lower until wage price growth begins to slow.
Therefore, it may be too early for the ECB to undermine the euro's appreciation.
EUR/USD Technical Outlook
The EUR/USD price formed higher bottoms and found resistance at the 1.1070 area, creating an ascending triangle in its short-term timeframe. The price may bounce back, as technical indicators suggest. The 100 SMA crossed above the 200 SMA to indicate that the general trend is still up or that the support is more likely to hold than break. In this case, EUR/USD could make its way to the resistance again, and the bulls will be closest to 1.1085, 1.1120, and 1.1200, respectively.
The stochastic is moving higher after indicating oversold levels for some time. The oscillator has plenty of room to rise before it reverses exhaustion among the buyers. Likewise, the RSI is heading higher, so EURUSD may follow suit as bullish momentum returns. Breaking the support level at 1.0920 is important for the bears' new control.
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