EUR/USD outlook: Currency Pair of the Week - April 8, 2024

• EUR/USD outlook: US CPI and ECB policy decision coming up this week
• German industrial production surprises and investor sentiment improves
• US dollar unable to find meaningful support despite a robust jobs report

The EUR/USD continues to remain stuck in a tight range above the 1.08 handle. Although we have had some improvement in Eurozone data, with German industrial production rising to a 13-month high, it is the dollar which has failed to find significant support despite Friday’s robust US jobs report for March that is raising eyebrows among some market observers. A hot inflation report this week could give it a more meaningful bounce, while the ECB could use this week’s meeting to cement expectations for a June cut.

EUR/USD outlook: What are FX traders watching this week?

The US dollar eased off after initially rising on the back of the NFP data on Friday, with FX investors showing reluctance to hold the dollar, possibly because of the risks associated with the release of the March US Consumer Price Index (CPI) data on Wednesday. The CPI data could be pivotal in shaping market sentiment and could be among the determining factors for the Fed’s decision to cut rates in one of the upcoming monetary policy decisions. As well as the CPI data, attention will be drawn to the upcoming policy rate meetings scheduled in the eurozone, Canada, and New Zealand, as well as the FOMC’s meeting minutes.  The ECB rate decision is likely to be more interesting one out of these, as Christine Lagarde potentially sets the stage for a rate cut in June. The EUR/USD is therefore among the major pairs to watch this week.

German industrial production surprises and investor sentiment improves

In recent weeks we have seen mild improvement in German data, and this explains why the EUR/USD and other euro crosses have been able to hold their ground quite well. We had some further improvement in German data, this time it was industrial production, while a leading indicator of economic health by surveyed analysts and investors in the Eurozone showed more improvement than expected, even if sentiment remained pessimistic.

In February, industrial data witnessed a notable uptick, rising by 2.1% month-on-month, marking the second consecutive monthly increase. However, despite this positive momentum, industrial production still languished on an annual basis, experiencing a decline of 4.9%. The latest surge in industrial production can be attributed to robust performances across various sectors, with the exception of energy production. Notably, the construction sector experienced a substantial boost, skyrocketing by nearly 8% month-on-month, fuelled by favourable weather conditions and a notable uptick in the real estate sector's performance.

Additionally, the Eurozone Sentix Investor confidence index came in better than expected. It improved to -5.9 compared to -10.5 last as -8.3 expected. The result of this survey of about 2,800 investors and analysts, which asks respondents to rate the relative 6-month economic outlook for the Eurozone, shows that although investor sentiment remained in pessimistic territory, the situation was nonetheless better than the first week of March. The Sentix Investor Confidence has remained in the pessimistic territory since February 2022.

EUR/USD outlook: US CPI and ECB policy decision coming up

Friday’s stronger US jobs report came as a real surprise, disappointing those who were convinced that the Fed would cut interest rates in June. Correspondingly, the odds of a cut in June have fallen to just over 50%, causing bond yields to rise further.

The week ahead features more market-moving events that could potentially set the tone for the rest of the month. For EUR/USD, Wednesday’s CPI report and ECB’s policy decision a day later have the potential to move the popular trading pair out of its recent ranges.

US CPI expected to climb for second month

The short-term trajectory of the US dollar hinges significantly on upcoming data releases, particularly regarding the Fed’s anticipated interest rate cuts for 2024. Whether these projections will be revised downwards to just two cuts or maintained at three depends on the incoming data. The market is pricing in three rate reductions, albeit with some uncertainties surrounding the likelihood of a rate cut in June in the wake of a stronger-than-expected US jobs report. If the Consumer Price Index exceeds expectations, the probability of a June rate cut could diminish further and fall below 50%. Conversely, any significant downturn in economic activity or inflation figures would reinforce the case for a minimum of 75 basis points in rate cuts for the year, potentially even more. Analysts expect the headline CPI to print +3.4% year-over-year, compared to the previous month's +3.2% reading. Meanwhile both headline and core CPI estimates on a month-over-month basis are expected to register +0.3%, following gains of +0.4% in the preceding month.

ECB could prepare markets for June cut

Last week we saw Eurozone CPI surprise to the downside with a headline print of 2.4% year-on-year in March compared to 2.6% in February, with core CPI weakening to 2.9% from 3.1% in February. Though Eurozone CPI is now close to the ECB’s 2% target, it is probable that the central bank will defer any interest rate adjustments until June. Christine Lagarde and her ECB counterparts could utilise this week’s meeting as an opportunity to lay the groundwork for a potential rate cut in June. The necessity for additional data on wage growth remains pertinent, with further insights expected to be unveiled in May. The ECB wants to ensure that wages are coming down before starting the rate-cutting cycle.

EUR/USD technical analysis

Source: TradingView.com

The EUR/USD remains stuck in a tight range, oscillating around its 200-day moving average at 1.0835. After creating an inverted hammer above the 200 MA on Thursday, this was followed by a doji formation on Friday, below it. The shapes of these candles suggests that both the bulls and bears lack conviction, making the EUR/USD ideal for those looking to take advantage of range-bound trading opportunities.

Short-term support now comes in around 1.0795, which corresponds with the bullish trend line that was re-established following a brief break last week. Should rates break below the trend line again, then that would present a bearish technical development. In that case, we could see follow-up technical selling towards the 1.0695 to 1.0725 area again, where rates have found good support in recent months.

On the upside, the EUR/USD now needs to move sharply above its 200-day MA to establish a clear directional bullish bias. Until that happens, range-bound trading is the name of the game for the EUR/USD.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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