- The recent rebound attempts for the currency pair EUR/USD did not take it out of the general downward trend, as its gains did not exceed the resistance level of 1.0787.
- Technically, its recent losses were strong, as they moved towards the support level of 1.0695, its lowest in three months, as the US dollar gained strong and positive momentum from the results.
- US economic data, which confirms the strength of the economy despite the path of tightening the policy of the US Federal Reserve, which will announce the content of the minutes of its last meeting this week.
- In general, according to the economic calendar data, the main US data releases were mixed, as consumer and producer prices readings were stronger than expected, while retail sales data were weaker.
- Inflation data had a greater impact on the Treasury market and the US dollar rate made net gains, although the EUR/USD pair was resilient with only minor losses to 1.0770.
Overall, market confidence in the US Federal Reserve's near-term interest rate cut continued to decline with the chances of a May rate cut falling below 40%. The Commercial International Bank had indicated consumer price data, which was stronger than expected, “Today’s report reinforces our call that the US Federal Reserve will remain unchanged through the second half of 2024.”
Meanwhile, the bank still expects the US Federal Reserve to act if the economy weakens. As progress in core inflation stopped for the first time in more than six months. The significant progress in core inflation achieved in the second half of 2023 still makes the Fed less willing to tolerate a material slowdown in the economy. However, according to Goldman Sachs, “We still expect the FOMC to leave the federal funds rate unchanged at its March meeting and begin the easing cycle in May.”
For its part, HSBC believes that the shift in expectations is important. added “This reassessment has always been a key part of our bullish view on the US dollar, helping the currency through higher yields and hitting risk appetite,”. Also, “It may still have more time, but it is likely that the lion’s share of the interest rate adjustment has already taken place, bringing the EUR/USD, for example, closer to our expectations at the 1.05 support.” A material break below this level may need to change expectations as to whether cuts will be possible at all.
For its part, Credit Agricole Bank believes that there is limited scope for achieving further gains for the dollar. Said, “We believe that there are some positives in the price of the US dollar, and with the currency reaching and even exceeding our goals for the first quarter, we maintain our neutral view of the currency.” For its part, HSBC looks at the US elections and does not see a conclusive argument for the dollar’s movements. Noted, “Our report also shows that multiple channels of influence mean that elections can affect the US dollar in different ways, ensuring that they cannot be ignored, even if rapid moves from each element create a mixed picture for the US dollar,”.
Ultimately, Société Générale Bank questioned its expectations of a weak US dollar after strong inflation data and strong data. Noted, “It all screams ‘strong dollar’ and laughs in the face of Forex companies’ forecasts – especially ours, which are the only ones I care about,”. Therefore, should we stick to our view that the expensive dollar needs a daily regime of better-than-expected data just to keep it where it is and will eventually fall, or should we just embrace American exceptionalism?
Added; “If the US economy returns to acceleration, the Fed will eventually be forced to tighten monetary policy again, and the US dollar will rise, threatening to peak in 2022. A soft landing will not do much for the dollar, but a re-acceleration will.”. Moreover, the US Dollar Index (DXY) could develop a more consistent uptrend day after day, likely fueled by the Federal Open Market Committee's expectations in March.
At the same time, HSBC remains concerned about core inflation in the Eurozone. Said, “This economic recession has not yet been sufficient to provide sufficient confidence for policy makers that inflation will return to target.” Therefore, the bank expects the European Central Bank to remain steady, but added, “It suggests that policy pressure on activity may need to continue for inflation to make its final decline towards target. Consequently, there is a combination of growth and inflation that compares unfavourably with that seen in the US, and will make any recovery in the euro against the US dollar difficult.
Will the Price of the Euro Rise in the Coming Days?
In this regard, currency analysts at BNP Paribas expect the euro to rise against the US dollar “EUR/USD” to the resistance level of 1.15 by the end of 2024. However, Barclays Bank sees downside risks for the EUR/USD pair, with its first-quarter forecast at the support level of 1.05. Meanwhile, Danske Bank still anticipates net gains for the US dollar. According to the bank's analysts' forecasts, "We maintain the strategic stance of a EUR/USD decline based on relative trade conditions, real rates, and relative unit Labor costs. Thus, we expect a bearish trajectory throughout the year. In the short term, we prefer selling the pair on rallies."
However, Westpac still expects a strong tone for the dollar, stating, "The EUR/USD pair risks retesting its lowest levels in October 2023 around the 1.0450 support area if the strength of the US dollar persists."
EUR/USD Technical Analysis and Forecast:
We expect a quiet trading session today amid the US holiday, which affects liquidity and investor risk-taking. Therefore, the EUR/USD pair may continue to move within tight ranges with a downward bias, stabilizing below the psychological support level of 1.0800, as the factors supporting the strength of the US dollar persist. Currently, the nearest support levels, based on daily timeframe chart performance, are 1.0720, 1.0655, and 1.0580, while from the second and final level, technical indicators will move towards oversold levels. Conversely, during the same timeframe, a reversal of the overall downward trend will not occur without returning to the vicinity of the 1.0885 resistance level. This week, the EUR/USD pair will react to the release of the minutes from the latest Federal Reserve meeting and the Purchasing Managers' Index readings for the manufacturing and services sectors in both the Eurozone and the United States.
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