EUR/USD tests 50-Day SMA for first time since November

Euro Outlook

EUR/USD attempts to retrace the decline from the monthly high (1.1033) as Federal Reserve Chairman Jerome Powell insists that the ‘disinflationary process’ has begun, but the exchange rate may struggle to retain the advance from the January low (1.0483) as it tests the 50-Day SMA (1.0693) for the first time since November.

EUR/USD tests 50-Day SMA for first time since November

Recent remarks from Chairman Powell appear to be propping up EUR/USD as the central bank head alludes to ‘the very early stages of disinflation,’ and speculation for an imminent change in regime may continue to drag on the Dollar as the Federal Open Market Committee (FOMC) nears the end of its hiking-cycle.

In turn, EUR/USD may continue to track the positive slope in the moving average as the European Central Bank (ECB) plans to ‘stay the course in raising interest rates significantly at a steady pace,’ and it remains to be seen if the EU Summit will sway foreign exchange markets as President Christine Lagarde and Co. intend to ‘raise interest rates by another 50 basis points at our next monetary policy meeting in March.’

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However, the ECB may not be too far behind its US counterpart as board member Isabel Schnabel highlights a terminal rate of 3.50% for the Euro Area, and the Governing Council may pause its hiking-cycle later this year in an effort to avoid a recession.

As result, EUR/USD may no longer respond to the positive slope in the moving average as Fed officials see US interest rates rising towards 5.00%, and the exchange rate may face a further decline over the coming days as it extends the series of lower highs and lows from the monthly high (1.1033).

With that said, expectations for another 50bp ECB rate hike in March may limit the downside risk for EUR/USD, but the exchange rate may struggle to retain the advance from the January low (1.0483) as it marks the longest stretch of decline since November.

Euro Price Chart – EUR/USD Daily

Chart Prepared by David Song, Strategist; EUR/USD on TradingView

• EUR/USD appears to have reversed ahead of the April 2022 high (1.1076) as it tests the 50-Day SMA (1.0693) for the first time since November, and the exchange rate may no longer track the positive slope in the moving average if it fails to defend the opening range for 2023.
• A break/close below 1.0610 (38.2% Fibonacci retracement) raises the scope for a run at the January low (1.0483), with the next area of interest coming in around the December 2022 low (1.0393).
• However, failure to hold below the moving average may curb the recent series of lower highs and lows in EUR/USD, with a move above the 1.0880 (23.6% Fibonacci extension) to 1.0940 (50% Fibonacci retracement) region bringing the monthly high (1.1033) on the radar.

--- Written by David Song, Strategist