- Strong US economic data results at the start of trading this important week allowed bears to drive the EUR/USD currency pair towards deeper support levels.
- It hit the lowest level for the euro dollar in a month and a half at 1.0730.
- The EUR/USD may remain low pending the reaction to the US jobs figures announcement this week. As I mentioned before, the 1.0800 support level will open the door for bears to move the euro dollar towards stronger support levels.
Results of the Economic Calendar data
The US ISM Manufacturing PMI rose to a reading of 50.3 in March 2023, up from a reading of 47.8 in February and exceeding market expectations of 48.4. Obviously, this represents the first growth in the manufacturing sector after 16 months of contraction. There were positive trends in demand, with indicators such as the New Orders Index (51.4 versus 49.2 the previous month) and the New Export Orders Index (51.6, the same figure in February) showing expansion, while the backlog of orders (at 46.3) remained at a moderate level of contraction. Participating companies also significantly increased their production levels (54.6 versus 48.4). On the other hand, employment figures continued to decline (47.4 versus 45.9). At the same time, prices continued to rise moderately to 55.8 from 52.5, driven by volatile commodity costs.
Spending on construction in the United States contracted by 0.3% from the previous month in February 2024, following a 0.2% decrease in the preceding month and defying market expectations of a 0.7% increase. This marks the second consecutive decline in construction spending, driven by a decrease in public construction expenditures (-1.2%). Meanwhile, private construction spending remained unchanged, with a 0.7% increase in residential construction offset by a 0.9% decrease in non-residential construction. On an annual basis, construction spending grew by 10.7% in February.
The question now is: Will the euro's price rise in the coming days?
In this regard, forex market analysts at Danske Bank see potential for the euro's exchange rate against the dollar (EUR/USD) to rise to the psychological resistance level of 1.10 on a monthly basis, but they anticipate a new decline to the support level of 1.05 over a 12-month period. Conversely, ING Bank sees room for the euro to decline against the US dollar (EUR/USD) in the short term due to hawkish comments from the Federal Reserve, but they expect significant gains to 1.14 by the end of this year. During the week, the EUR/USD pair dropped to its lowest levels in 5 weeks, staying below the psychological level of 1.0800 amid hawkish rhetoric from the Federal Reserve.
Regarding the US Federal Reserve's policy, Fed Chair Powell adopted a broadly hawkish stance in his statements last Wednesday. According to Powell, the Federal Reserve needs to see at least two months of data to ensure that US inflation is heading towards 2% and that there is a need for further progress before supporting an interest rate cut.
In this context, he added that there was no rush to cut interest rates, and the latest data suggest that there may be fewer interest rate cuts this year, especially since the most recent data has been generally disappointing. Following these comments, markets now expect a slightly lower probability, down from 70% previously, of the Federal Reserve cutting interest rates at the June policy meeting, to around 65%.
Danske Bank still expects the US Federal Reserve to ease as the economy deteriorates. It said: "We expect the current disinflationary trend to allow the Fed to cut earlier than the market expects in May, followed by two more quarterly cuts during the year." Danske added; "In the near term, we believe the prospect of an early Fed cut poses an upside risk to the currency, and perhaps markets have also become too optimistic about US exceptionalism and too pessimistic about economic data from the euro zone and China."
However, he added: "Strategically, we maintain our positive bias for the US dollar, as the structural growth story looks much stronger compared to the rest of the world."
ING Bank commented: "Better activity data and price stability have supported US interest rates and the dollar in the first months of the year. However, according to the bank; "The Fed's commitment to easing suggests that the dollar's downward trend is already starting to show now." He added; "We look for the soft-landing narrative to gain momentum over the coming months and expect dollar spreads to move to see the EUR/USD currency pair rise gently above the year-end consensus at 1.10."
Moreover, according to Credit Agricole Bank: "We expect both the Fed and the ECB to start cutting interest rates in 2024, but we believe that the Governing Council will ease rates more aggressively than the FOMC." He added that the euro "will be one of the worst performing currencies in 2024 on the back of the more dovish ECB policy stance and ongoing concerns about the euro zone outlook".
The EUR/USD exchange rate is expected to reach 1.05 by the end of 2024.
However, Westpac expects a constructive tone for the US dollar in the short term and added: "It looks set to break higher, with the ECB, Bank of England and Bank of Canada all set to cut rates in June, while June Fed rate cut expectations are at risk of being scaled back." According to Westpac, the EUR/USD pair may remain range-bound, but the 1.0700 support level appears increasingly vulnerable as the US dollar remains strong. NatWest, for its part, expects the EUR/USD pair to reach 1.15 by the end of 2024.
EUR/USD Technical analysis and forecast:
The continued momentum of the US dollar against other major currencies in the shadow of the US Federal Reserve's hawkish policy will ensure that the bears control the performance of the EUR/USD currency pair. Technically, moving below the psychological support level of 1.0800 will ensure the bears further downward movement. As mentioned, the next most important support levels 1.0745 and 1.0670 will move the technical indicators towards strong oversold levels. Ultimately, the euro-dollar pair will remain under downward pressure until the market and dollar react to the announcement of US jobs figures at the end of the week.
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