Euro Talking Points:
- Bears have been in control of EUR/USD for much of this year so far. But they’ve lacked aggression on support tests as price has shown a tendency to slow or stall at tests of fresh lows.
- There was a knee-jerk lower last week after the U.S. CPI print, but much of that was buffered a day later when Chicago Fed President Austan Goolsbee urged market participants not to get ‘flipped out’ about a single inflation print, even though Core CPI has oscillated around the 4% mark for the past five months.
- That comment highlights a Fed that really doesn’t seem to be open to tighter policy options, even in the scenario of inflation entrenchment, and that’s helped to lead to another push-lower in the U.S. Dollar which has buoyed EUR/USD up to fresh two-week-highs.
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I’ve said this numerous times in webinars over the past month but, with USD trends pushing higher so far in 2024 it seems as though the ‘natural flow’ of the market is supportive of U.S. Dollar strength as taken from the chart. Yet, it also seems that there’s been a concerted effort from Fed officials to invoke dovish commentary considering the broader backdrop.
And that backdrop isn’t great in many areas of the world. Japan went back into recession last week. Chinese markets have been in a vulnerable state for a while now. And there’s percolating worries around Germany, which is the stalwart of the Eurozone and an economy that’s really important to both internal and external trade partners. If you look around the world right now, there’s not many places that are growing quickly and that’s what makes the positive data out of the U.S. stick out so much.
Earlier this month the unemployment rate came in at 3.7%, and then last week’s inflation report showed another beat of the expectation. Core CPI, which strips out food and energy, has now spent the past five months in a range between 4.1 and 3.9%, further illustrating the ‘entrenchment’ of inflation that the Fed has previously said that they feared a consequence when slowing down rate hikes.
This is likely one reason for the initial reaction to that CPI news last week, which helped to push DXY up to a fresh two-month-high at the 105.00 handle. But it was a day later that dovish Fed-speak started to un-do the move as Austan Goolsbee’s ‘flipped out’ comment got a lot of attention, highlighting a Fed that not only doesn’t look like it wants to hike – but seems to be seeking out data that can support cuts.
This could be seen as somewhat similar to the ‘transitory’ ordeal that roiled markets in 2021 and 2022, with the Fed watching as inflation jumped above 5, 6 and 7% while they remained heavy-handed on stimulus with both low rates and QE.
If one had to guess Fed stance, erring on the dovish side seems like a logical assertion as that’s been the pattern for much of the past 15 years since the GFC.
In EUR/USD, the big question is whether data will begin to tilt to support that recent push. The next major push point there is on Thursday with Eurozone CPI set to be released and the expectation is for a print of 2.8% for headline and 3.3% for Core CPI; both of which would be a clear illustration of lower inflation in Europe than the U.S. But also on Thursday morning we’ll get PMI prints out of Europe and those have taken on a lot of attention of late as they’re looked to for their leading qualities, and both manufacturing and services PMIs are expected to print below the 50-level, which indicates contraction. And again, that is at odds with recent PMIs in the U.S. that have continued to show expansion.
The chart for EUR/USD shows this impact well: The 200-day moving average was support for two weeks and sellers finally pushed their break after the NFP report earlier in the month. After one day of continuation following that, the pair pulled back, but bulls couldn’t make it very far as resistance held at prior support, around 1.0796. That held until last week’s CPI report, which again drove bears to fresh lows. But the following day is when the ‘flipped out’ comment hit the wires, and the trend has been in reverse ever since.
EUR/USD Daily Price Chart
Chart prepared by James Stanley, EUR/USD on Tradingview
EUR/USD Shorter-Term
Going down to the four-hour chart highlights some recent bullish structure given the push to fresh two-week highs. The prior spot of resistance, around 1.0796, now presents support potential for pullback scenarios. Below that is a prior swing around 1.0762, both of which could be used for bulls to support a continuation of higher-highs and higher-lows.
For resistance, from the below chart the test of the 200-dma is clear but if bulls can hold higher-low support, that moving average remains a key point of emphasis. That currently plots around 1.0825, and above that, the next spot of resistance on my chart is the prior swing around the 1.0900 handle.
EUR/USD Four-Hour Chart
Chart prepared by James Stanley, EUR/USD on Tradingview
--- written by James Stanley, Senior Strategist
