The EUR/USD edged higher in the first half of Friday’s session, along with other major foreign currencies while the dollar eased back down after steadily climbing in the past three weeks or so. Given the recent bullish dollar trend, I wouldn’t be surprised if the EUR/USD were to weaken as we transition to the second half of the session. There is not much in the way of fresh catalysts to drive the euro higher, while the dollar is benefitting from slight hawkish repricing of US interest rates. With some of the noise around potential US involvement in Iran and even Greenland easing — at least for now — market attention has drifted back towards macroeconomics and away from geopolitics. On that front, nothing looks especially dramatic, but the message is consistent: US growth remains steady rather than spectacular, and the dollar continues to hold its ground on any short-term dips. Against this backdrop, the EUR/USD forecast looks range-bound with a slight dovish tilt.
Can the dollar extend recovery?
The dollar has been inching higher in recent weeks, largely on slight improvement in macro backdrop. Recent US data have been on the firmer side – retail sales and jobless claims in particular – while the Fed’s Beige Book painted a picture of an economy still expanding gently, with no obvious cracks appearing in the labour market. Against that backdrop, markets have pushed up their US interest rate expectation modestly higher, which, in turn, has allowed the US dollar to find some love.
Underscoring this sentiment, we saw the latest initial jobless claims figures come in below 200,000 yesterday, pulling the four-week average down to its lowest level in two years. The data suggests the labour market is cooling only gradually, with hiring slow and layoffs remaining limited (low hire, low fire). Manufacturing data also surprised to the upside, with both the Empire State index (7.7) and the Philly Fed reading (12.6) beating expectations. Put together, it’s no surprise that markets have further pared back the odds of a first-quarter rate cut, now seen at roughly 20%, especially with Fed officials sticking to a firmly hawkish tone.
With today’s data calendar looking light, there’s little reason to fade a gently bid dollar. One potential risk over the coming weeks could be coordinated intervention to sell USD/JPY near the 160 level, particularly as the US Treasury appears supportive of such a move. For now, though, the dollar remains supportive on the dips.
Euro: no major drivers
The EUR/USD volatility has been falling quite a bit and that reinforces the view that the pair is likely to stay range-bound in the near term. With volatility depressed and demand stronger for higher-yielding currencies and precious metals, investors are shying away from the relative stability of the euro. With the eurozone data calendar looking thin, EUR/USD forecast thus remains modestly bearish amid the lack of any meaningful drivers.
Technical EUR/USD forecast and key levels to watch
With support in the 1.1620-1.1635 area broken yesterday, this is now the most important resistance zone to watch. Could we see the EUR USD exchange rate resume lower from here? If it does, the next downside target is the 200-day average around the 1.1580 area, below that not much further obvious support until 1.1500. The EUR/USD forecast would only turn bullish as things stand if it were to climb out of its bearish channel in the coming days.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
