- EUR/USD Outlook Positive as Dollar, Yields Fall
- FOMC Minutes and Preliminary Global PMIs Among Top Macro Highlights
- EUR/USD Technical Analysis: Bullish Momentum Could Take the Pair Towards 1.10
The pair is likely to be among the most active currency pairs this week, and I expect it to potentially rally towards the 1.10 level amid improving risk sentiment and recent declines in US yields. and the . Although the economic situation in the eurozone remains far from convincing, the market may have gotten ahead of the ECB’s rate cuts that were already priced in in April.
We are likely to see a pushback against those optimistic expectations from more ECB officials after Governing Council member Pierre Wunsch said the central bank may have to raise rates again if investors bet on monetary easing. They undermine the political stance of the institution.
Meanwhile, the next U.S. interest rate move is likely to be a cut, possibly as early as the second quarter, as signs emerge that inflation is on a steady path of easing toward the average inflation target. 2% from the Federal Reserve in the long term. This week, the united states economic calendar It is relatively quiet, but we will still have some important macroeconomic aspects that could move the EUR/USD and other currency pairs.
US Dollar Prospects Ruined by Weak Inflation Data
The US dollar started the new week lower, extending its losses from the previous week, when the dollar index had fallen almost 1.9%. Most of last week’s losses came on Tuesday, when the United States came in weaker than expected. Even before the CPI data, there was much speculation that the Federal Reserve had reached the end of its rate raising cycle.
But following last week’s colder inflation data, attention has shifted to when the Fed will start cutting rates again. Previously, the market speculated that this would begin in the middle of next year at the earliest. But now, the market is pricing in around 30% of a first Fed rate cut coming in March. For what it’s worth, I think that view is quite optimistic, but the Fed is likely to make cuts sooner than it had projected in its dot plots at the September meeting.
Along with the dollar, US bond yields plunged last week after the US CPI fell more than expected, cementing expectations that the Federal Reserve (and other central banks) will no longer raise rates. We also had a couple of other key US economic indicators weaken as well, such as data and, although they also took a sharp drop, before recovering on Friday.
EUR/USD ignores data disappointment
While the CPI-inspired dollar selloff helped fuel a rally in rates like the pair and EUR/USD early last week, the following days were dominated by consolidating price action, before Dollar sales will resume on Friday, which has carried Monday’s session so far.
In Europe, economic indicators have remained weak, although some improvement was seen in confidence data in Germany. With much of the negativity already priced in, the euro has been able to shrug off the recent data disappointment. Will that race continue this week?
Week Ahead: FOMC Minutes, Thanksgiving and Global Flash PMIs
It remains to be seen whether the US dollar and bond yields will see further declines this week, but as we saw last week, a lot will depend on the data that comes out. Some investors will be waiting for the slowdown in inflation in the US They will have much more to do as higher borrowing costs increasingly weigh on economic activity and home rentals slow further in the coming months. Unfortunately, we won’t have a ton of market-moving data this week, but there are still at least some macroeconomic highlights to look forward to.
Due to the Thanksgiving holiday on Thursday, US data will be brought forward one day and data from the latest FOMC meeting will be released on Tuesday instead of the usual Wednesday. Since their last meeting, Federal Reserve Chairman Jerome Powell has spoken alongside several other policymakers, suggesting that the Fed is in no rush to raise interest rates due to evidence that pressures inflationary pressures continue to ease at a gradual pace.
We then had a weaker CPI report followed by a failed PPI last week, both pointing to easing price pressures. Therefore, the FOMC minutes may have limited impact unless they reveal that the Fed was already more dovish than expected, in which case we could see the dollar fall in reaction. Otherwise, most of this week could well be characterized by consolidation in what will be a quieter week for data and given the shorter week for the US and Japan.
The latest PMI data will be published between Thursday and Friday, with those from Europe and the US being the most relevant for the EUR/USD pair.
Despite positive signs on the inflation front, growth remains a major concern for most European countries, which may limit the upside potential of stocks like EUR/USD and GBP/USD in the outlook. slightly longer. Lately we have seen a slight improvement in some forward-looking indicators, such as the German ZEW survey and the Sentix investor confidence index for the eurozone.
But the PMI has remained bearish throughout the year, while retrospective data has been mostly negative. However, if surveyed purchasing managers in the manufacturing and service industries indicate that conditions have improved in November, then we could see the euro and pound regain ground against the dollar.
Unlike Europe, US PMIs again surpassed the expansion threshold of 50.0, if only just, last month. We have also seen resilience in other US data, while inflation has started to fall more rapidly. So far, it looks like the United States can avoid a recession despite high interest rates.
But let’s see if the resilience of the world’s largest economy will remain or if high interest rates will take their toll. Preliminary PMI data will give us a snapshot of the health of the US economy on the final day of the week. But with many U.S. investors expected to be on vacation, volatility could be low on Friday.
EUR/USD Technical Analysis
Following last Tuesday’s big rally, the EURUSD consolidated those gains bullishly over the next two sessions, giving up very little and staying above the 200-day average. This strongly suggested that more gains could be on the way, which occurred on Friday.
The continuation of Friday’s bullish momentum means that the path of least resistance remains bullish for now, with support now being the area where EUR/USD had struggled in the middle of last week, namely between 1.0880 and 1.0900 .
The line in the sand is now at 1.0825, Friday’s low. If EUR/USD were to fall below that level now, I would expect to see a correction towards the base of last week’s breakout at 1.0725ish. But this is not my base scenario.
Given the increasing bullish momentum and price action, a run towards the 1.10 level seems the more likely scenario from here, than a drop below 1.0825.
Credit: City Index