EUR/USD analysis: Is euro heading to $1.10?

 

• EUR/USD analysis: Short-term outlook remains positive, underpinned by falls in dollar and yields
• Jobless claims and global Flash PMIs among key macro highlights this week
• EUR/USD technical analysis: Bullish momentum could lift pair towards 1.10

 

The EUR/USD has fallen in the last couple of days, but there’s still a good chance that it will climb to the 1.10 mark due to ongoing weakness in US bond yields and improved risk sentiment in financial markets. Although the economic situation in the eurozone isn't very convincing, there might be premature expectations about ECB rate cuts happening as early as April. ECB Governing Council member Pierre Wunsch pushed back on these optimistic expectations earlier this week, stating that the central bank might need to raise rates again if investor bets on monetary loosening undermine its policy stance. In the US, the next interest rate move is likely to be a cut, possibly in the second quarter, as signs emerge of inflation consistently easing toward the Fed's 2% target in the long term. This week's economic calendar is relatively quiet, but there are still important macro highlights that could impact the EUR/USD and other FX pairs.

 

EUR/USD analysis: US dollar mixed but near-term outlook remains bearish

 

The US dollar has shown mixed signals this week, recovering somewhat from a sharp drop the previous week when the Dollar Index fell by nearly 1.9%. Most of last week's losses occurred on Tuesday due to a weaker-than-expected US CPI print. Even before the CPI data, there was speculation that the Federal Reserve had concluded its rate-hiking cycle, something that wasn’t obvious from the FOMC minutes that were released last night. Nevertheless, with last week's cooler inflation data, attention has shifted to when the Fed might start cutting rates again. Previously, the market expected this to happen no earlier than the middle of next year, but now there's about a 30% chance of a first Fed rate cut in March. While I find this view optimistic, the Fed is likely to cut rates sooner than projected in its September meeting dot plots. If upcoming data point to subdued economic activity, then talks of a sooner-than-expected rate cut will get louder.

 

Despite the dollar’s hesitation, US bond yields have continued to ease further as expectations grow that the Fed (and other central banks) will no longer raise rates from current levels. This is likely to keep the dollar under pressure, underpinning the EUR/USD, even if don’t have much in the way of positive news from the eurozone. Here, recent economic indicators have not shown any major signs of a revival, although some improvement in forward-looking ZEW sentiment data was observed for Germany. With much of the negativity already priced in, the euro has been able to shrug off the recent data disappointment. Will that run continue this week?

 

 

Yields could decline further as investors will be expecting the slowdown in US inflation will have much more to go as higher borrowing costs increasingly weigh on economic activity while housing rents slow further down in the coming months. Unfortunately, we won’t have an awful lot of market-moving data this week, but there are still at least a few key macro highlights to look forward to.

 

Coming up: Jobless claims, durable goods orders and UoM surveys due

 

Due to the Thanksgiving holiday on Thursday, US data will be pushed forward by a day and the weekly jobless claims data will be published today instead of the usual slot on Thursday. We will also have the latest data on durable goods orders, as well the revised UoM sentiment surveys on consumer sentiment and inflation expectations.

 

 

Global Flash PMIs crucial for EUR/USD direction

 

The most recent PMI data, crucial for the EUR/USD pair, is set to be released between Thursday and Friday.

While there are positive indications regarding inflation, concerns persist about growth in many European countries, potentially limiting the upward potential for pairs like EUR/USD and GBP/USD in the slightly longer term. Despite some recent improvement in forward-looking indicators such as the German ZEW survey and the Sentix investor confidence index for the Eurozone, PMI figures have remained pessimistic throughout the year, and historical data have generally been negative. However, if the November survey from purchasing managers in manufacturing and services suggests improved conditions, we could witness the euro and pound gaining ground against the dollar.

In contrast to Europe, US PMIs returned to levels above the expansion threshold of 50.0, albeit marginally, last month. But at the same time, inflation has started decreasing more rapidly. Currently, the US seems poised to avoid a recession despite high interest rates. The forthcoming flash PMI data will offer a snapshot of the US economy's health on Friday. However, with many US investors expected to be on holiday, Friday might experience thinner volatility.

 

EUR/USD technical analysis: key levels to watch

Source: TradingView.com

 

Following last Tuesday’s big rally, the EUR/USD hasn’t moved much further higher since. But it has now managed to hold above the 200-day average for 6 sessions and counting. This may be a sign of strength, keeping the path of least resistance to the upside.

At the time of writing, the EUR/USD was testing support around an area where it had struggled in mid last week, namely around 1.0880 to 1.0900. The bulls will need to step back in around these levels to keep the bullish momentum alive.

The critical point to watch is currently at 1.0825, which was Friday's low. If the EUR/USD falls below this level, I would anticipate a correction toward last week's breakout base around 1.0725. However, this isn't my primary expectation.

 

Considering the recent bullish momentum, it seems more probable that the EUR/USD will move towards the 1.10 level rather than dropping below 1.0825.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R