- The euro/dollar exchange rate “EUR/USD” looks vulnerable to further declines in the coming days, with attention focused on the European Central Bank (ECB) rate decision and the release of the major US inflation gauge.
- Currently, “EUR/USD”is trading around 1.0910 at the time of writing. Ultimately, 2024 has seen a strong comeback for the US dollar, and there is not much on our radar that suggests this cannot continue.
- However, the euro/dollar has found support from the declining expectations of an ECB rate cut and the technical support level of the 200-day moving average, which is currently at 1.0846.
Commenting on the Euro/Dollar performance, Scotiabank analyst Shaun Osborne said, "The euro/dollar looked vulnerable to further downside action last week, but the market twice tested and held the 1.08 mid-range area, where the 200 DMA currently resides. Also, the lack of selling pressure has helped to avoid further losses for the euro for now at least." Moreover, the analyst warns, "the market is still weak, with short-term momentum indicators and long-term price signals pointing to euro negativity."
For his part, City Index market analyst Fawad Razaqzada said that the euro/dollar pair is showing signs that "the bulls may have been caught in a trap, given its inability to hold above last week's hammer candle and support at 1.0877." added, "As a result, there is now an increasing risk that this bearish reversal could lead to a move below Wednesday's low of 1.0844, where no doubt some stop-loss orders are resting."
Overall, be prepared for volatility next Thursday, when the ECB is expected to keep interest rates unchanged and continue to push back against market expectations for a rate cut. While this may have supported the euro, especially against other pairs other than the US dollar, it has become a consensus view ahead of the January decision. This is because several ECB speakers who attended the Davos forum made it clear that a rate cut in the first half of 2024 would not happen.
Therefore, the barriers to further “hardening” developments that could strengthen euro exchange rates are high. For his part, Valentin Marinov, currency analyst at Credit Agricole Bank, says, “We believe that there may be room for a cautious surprise on January 25”. Added, “Especially if the ECB indicates that it is focusing on any evidence of the effects of the second round of deceleration in inflation, for example, peak wage growth and services inflation, this may keep core inflation heading lower.”
Also, the ECB could play down the inflationary effects of potential inflationary developments related to attacks on shipping in the Red Sea, referring to them as temporary. Accordingly, analysts believe that the single European currency - the euro - will continue to take its cues from the price movement in interest rates and yields in the euro zone. The euro must remain weak, and any dovish surprises from the ECB and/or negative economic surprises will erode the euro's price and the attractiveness of yields.
Ahead of Thursday's decision, watch Eurozone PMIs for signs that the Eurozone economy is struggling in January. As the Euro price has proven sensitive to this release in the past, the consensus expects the Composite Index to reach 18.1, Manufacturing at 44.8 and Services at 49. Moreover, with sentiment towards the Eurozone so poor, the biggest reaction is to the upside on any prints that challenge the gloom. Obviously, the only real question to ask is whether there is anything on the economic docket that can stem the fading expectations of a March rate cut at the US Federal Reserve in the coming days. In short, no, which is why the dollar could be favoured as we approach the second half of January.
EUR/USD Technical Analysis and Forecast:
Despite the current rebound in the EUR/USD pair since the start of the week's trading, the general trend is still bearish, and to create a fundamental change in the trend, bulls must move the currency pair to the resistance levels of 1.1000 and 1.1075, respectively. According to the performance on the daily time frame chart above, the support level of 1.0880 will remain confirmed for the continuation of the downward trend. Finally, the Euro/Dollar price may remain in narrow ranges until the reaction to the results of economic data and the policy decisions of the European Central Bank.
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