Euro to US dollar analysis: EUR/USD heading to 1.10?

• Euro to US dollar analysis: Has the dollar formed a near-term top?
• Euro to US dollar analysis: EUR/USD technical analysis
• What’s next for EUR/USD?

Euro to US dollar analysis: Dovish Powell, Lagarde comments underpin risk rally

Risk assets continued to surge higher after major central bank officials provided the strongest hints yet that monetary policy will be loosened soon.  Jerome Powell, the Fed Chairman, said that US interest rate cuts could commence this year and emphasised officials' awareness of the dangers of delaying loosing policy. Earlier Christine Lagarde, the European Central Bank President, hinted that policymakers might consider easing policy in June.

The ECB’s bearish signal lifted the DAX to a fresh record high, although it supported the risk-sensitive EUR/USD too. The latter was also buoyed by weakness in the dollar after Powell said that Fed rate cuts ‘can and will begin’ this year.

Euro to US dollar analysis: Has the dollar formed a near-term top?

The recent strengthening of the EUR/USD is primarily attributed to the weakening of the dollar rather than any significant strengthening of the euro. If anything, today’s dovish ECB should have hurt the single currency. The decline in the greenback on Wednesday was influenced by softer US data and Fed Chair Powell's comments, which lacked any surprising hawkish tone. Powell simply reiterated that rate cuts remain a possibility this year but emphasised the need for the Fed to exercise patience. Today, he went a step further by saying that Fed rate cuts ‘can and will begin’ this year.

The key macroeconomic highlight for the dollar is Friday's February Non-Farm Payrolls (NFP) report. The consensus forecast for NFP is around 200K jobs, although some leading indicators suggest it might be lower. A lower-than-expected NFP figure could negatively affect the dollar and boost EUR/USD and gold prices, leading to further weakening of the short end of the US yield curve. Any significant revisions to the January and December NFP figures, which were previously strong, could also trigger a sharp drop in the dollar. The opposite is obviously also true, but with the Fed Chair strongly hinting that the interest rate cuts will begin this year, there is a greater chance of a negative dollar reaction this time.

It is clear that pressure is mounting on major central banks to lower interest rates due to the rising debt burden in the US and other developed economies. Concerns arise over the ability of these nations to sustain high interest rates, as increased debt servicing costs coincide with the potential for an economic downturn, necessitating further borrowing at elevated rates.

This growing concern may be a contributing factor to the dollar's decline and the record highs observed in gold, a traditional safe-haven asset. While major currency pairs like GBP/USD and EUR/USD have also experienced upward movements, they remain constrained by similar debt challenges faced by the UK and Eurozone economies. Bitcoin reached a new all-time high above $69K on Tuesday, underscoring investor apprehensions about fiat currencies being devalued by inflation and escalating borrowings.

Euro to US dollar analysis: EUR/USD technical analysis

Source: TradingView.com

The EUR/USD initially fell before rising to a fresh weekly high. The positive post-ECB reaction in the EUR/USD exchange rate, despite the central bank lowering its inflation target, is quite bullish. What’s more, the technical picture is improving by the day. The EUR/USD has now held above its 21- and 200-day moving averages for several days, suggesting the bullish momentum is growing. This points to a potential rally towards 1.1000 if not higher in the coming days.

Given the above bullish signals, I would be more inclined to be buying dips in the EUR/USD than selling into rallies, a strategy that had worked well at the start of the year. Key short-term support is seen around 1.0850 to 1.0885ish, which now needs to hold to maintain the bullish bias. The line in the sand for me is at 1.0795, last week’s low. If the EUR/USD were to break back below that level then that would be a bearish outcome.

The key risk for the dollar bears is the upcoming US NFP report on Friday, and CPI next week. But judging by price action alone, it looks like the path of least resistance is clearly to the upside for the EUR/USD and so we should concentrate on bullish opportunities than bearish.

What’s next for EUR/USD?

As mentioned, we will have the US non-farm payrolls report on Friday, Consumer Price Index on Tuesday and the FOMC policy decision on March 20. These macro events should provide a clear directional bias for the EUR/USD and other major FX pairs. As things stand, it looks like the US dollar may have formed at least a short-term peak, which could see the EUR/USD rise towards the 1.10 handle than stage a sharp sell-off.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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