- EUR/USD in consolidation after recent gains
- Traders eye German CPI and US Core PCE Price Index
- Diverging policy between ECB and Fed points to appreciation in exchange rate
The EUR/USD has not moved much during Wednesday’s session. But it could still be heading towards 1.10 in the days ahead. This week’s upcoming data releases are unlikely to make a significant impact to the EUR/USD forecast. Assuming the calm in Europe continues, then investors’ focus will return to monetary policy. The divergence in monetary policy between the Fed (becoming dovish) and the ECB (remaining hawkish) points to an appreciation in the EUR/USD exchange rate.
Key US and Eurozone data coming up
We have important economic data coming up from both the Eurozone and the US in the next two days, which could pave the way for a sharp move in the EUR/USD, although we don’t think they have the potential to completely change the ongoing trend.
There will be plenty of data releases to provide short-term noise for the EUR/USD, starting Thursday morning and finishing by late afternoon on Friday. Among them, there will be two pieces of data that is likely to have the most impact on the EUR/USD and indeed many other currency pairs.
Thursday, March 30
The ECB hiked interest rates by 50 basis points a couple of weeks ago but offered no commitments for future rates despite recent indications made by many policy makers at the central bank. The ECB is keeping a close eye on the financial stability of the Eurozone banks, but it remains committed to tackling inflation if price pressures continue to show no let up. The German CPI is thus very important to watch as it will give a strong indication in terms of what to expect for Eurozone CPI (due on Friday) and ECB’s next move.
US Core PCE Price Index
Friday, March 31
This will arguably be the most important macro-pointer in what is a lighter week for scheduled data releases. Following the Fed’ policy decision last week, the market will be paying close attention to incoming inflation data in order to figure out whether more rate hikes will follow, or the Fed will hit the pause button. The Core PCE price index is the Fed’ preferred measure of inflation, so the market won’t take any surprise readings lightly.
Fed rate hike wild repricing continues
The EUR/USD forecast is likely to be dominated by the over risk appetite across the financial markets. The mood in the markets has brightened noticeably since Friday afternoon and that momentum has carried forward so far into this week. Stocks, crypto currencies and crude oil have all recovered sharply. Authorities on both side of the Atlantic have been quick to reassure investors of the underlying strength in the banking industry.
So, investors have reduced their high expectations that central banks, led by the Fed, will cut interest rates by as early as June. This explains why the USD/JPY pair has been propelled to above 132.50, after just last week falling to below 130.00 handle.
According to analysis by ING, markets moved from pricing in a 24% chance of a hike in May and 88bp of cuts by year-end on Friday to a 47% implied probability of a hike in May and 46bp of cuts by year-end as of this morning.
EUR/USD technical analysis
The EUR/USD spent much of Wednesday’s session in consolidation, although it has been trending higher in recent days. After bouncing multiple times around key support circa 1.0500 area, the market decided to break higher and move above interim resistance at around 1.0750 on Tuesday of last week. It then went on to climb above the 1.09 handle, before coming back down sharply from there.
Source: StoneX and TradingView
However, the retest of the 1.0750 level from above has held so far on a daily closing basis. Thus, the bulls are still in control of price action. So, we could see a continuation higher and the next stop could be above last week’s high at 1.0930, followed by 1.1000 handle, and possibly a new high for the year above 1.10333.
This bullish idea will remain valid for as long as price holds above the shaded grey area around that 1.0750 level.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R