Euro to US dollar analysis: EUR/USD heading sub-$1.08?

• Euro to US dollar analysis: Dollar recovers from earlier weakness as US jobless claims drop to lowest since September 2022
• EUR/USD analysis: Path of least resistance to downside
• EUR/USD technical analysis suggests 200-day could be broken

The EUR/USD gave up its gains from earlier on the back of further strength in US jobs and better-than-expected housing market data. The downside was mild, however, owing to a hawkish ECB. Still, with heightened volatility in financial markets and the dollar’s growing strength, backed by data, the EUR/USD remained at risk of further short-term weakness. Traders were eying a breakdown below the 200-day moving average support at 1.0845/1.0850 area.

Euro to US dollar analysis: Jobless Claims Drop to Lowest Since September 2022

Following stronger-than-expected CPI, jobs and retail sales reports in the last couple of weeks, today saw further evidence pointing to the resilience of the labour market.

Applications for US unemployment benefits unexpectedly dropped last week to the lowest level in more than a year, printing 187,000. The 16K drop was totally unexpected as analysts were looking for a 3K rise to 206K. Continuing claims fell for a third straight week to 1.81 million, the lowest since October.

On top of this, we had better-than-expected housing market data, at least if you ignore the revisions to November’s data. Housing starts fell 4.3% month over month, which was far better than a drop of 8.7% expected. However, the November print was revised to a still very high +10.8% m/m from +14.8% m/m reported initially. Meanwhile, building permits rose more than expected, printing +1.9% m/m vs. +0.6% expected, and there was a small upward revision in November’s print.

However, further weakness was evidence in manufacturing activity, this time from the Philly Fed index. Activity in the Philadelphia region has now declined for the 18 out of the past 20 months. The index printed -10.6 which was worse than the -6.5 expected.

US dollar recovers from earlier weakness

Earlier in the day, the US dollar rally had stalled with a positive signal coming from the stock markets during at least the first half of Thursday’s session. Investors will be eying more FedSpeak, which today will include the centrist Raphael Bostic.

The dollar has been in demand in recent days because of renewed concerns over the Fed’s inclination to maintain higher interest rates longer. This week’s rally has been triggered by Fed governor Christopher Waller, who suggested a measured approach, cautioning against any haste in considering near-term rate cuts. Waller highlighted the resilience of the US economy, and downplayed expectations of an imminent reduction in interest rates as a result. Let’s see if other Fed officials will echo his views.

EUR/USD analysis: Path of least resistance to downside

Despite the calmer conditions in the stock market, the selling pressure on the EUR/USD has resumed. The dollar simply remains the strongest currency out there, with the Fed rate cut expectations being pushed back out. Without a fundamental change in the current macro backdrop, the EUR/USD could drop further lower.

Admittedly, the ECB has also tried to push back against rate cuts, but what is lacking in the Eurozone is the type of economic data beats we have seen in the US. Investors are concerned that the major central banks like the Fed, ECB and BoE will not reduce interest rates as soon and as much as the markets have been expecting. While in the case of the US, it is a partly because of a relatively stronger economy, elsewhere – especially in the UK and Eurozone – it is mainly because of concerns about inflation remaining sticky, with wage pressures continuing to remain elevated.

We heard from the ECB President Christine Lagarde on Wednesday, suggesting that borrowing costs could come down in the summer rather than in spring, while several other ECB officials have also expressed concerns about wage inflation. Christine Lagarde is due to speak again at 15:15 GMT today.

With the ECB pushing back rate cut expectations, the single currency may well perform better against some of the weaker currencies. But against the dollar, it will require US data to start turning lower and fast. If that doesn’t happen, then the path of least resistance for the EUR/USD will remain to the downside.

EUR/USD technical analysis

Source: TradingView.com

The EUR/USD bulls will not like the fact that the EUR/USD has failed to hold onto the earlier gains, after it had formed a small hammer candle right at its 200-day moving average on Wednesday, when it climbed back above the broken support level of 1.0877. On the surface, Wednesday’s price action looks bullish and there was some follow thru earlier in the day. But many bullish patterns have broken down so far this year and this looks to be another such example.

As things stand, the EUR/USD was displaying signs that the bulls have been trapped, given its inability to hold above Wednesday’s hammer candle and support at 1.0877. So, there is an increased risk now that this bearish reversal could trigger a move to below Wednesday’s low of 1.0844, where some sell stops are undoubtedly resting.

If we get below Wednesday’ low, the next potential downside target could be around 1.0815ish, which was the point of origin of the last rally. The subsequent bearish target is the liquidity resting below the low of December at 1.0723.

On the upside, short-term resistance is seen just above the 1.09 handle, where the backside of the broken trend line comes into play.

Even if the improved risk appetite today helps to lift the EUR/USD off its lows, the bulls will still require a higher high to form on the EUR/USD to become confident that a bottom has been formed. Actually, a potential rise back above 1.0950ish would be a bullish signal since for price to get there, we will have formed a three-bar reversal.

So, a break above 1.0950 is what I am looking for to turn tactically bullish on the EUR/USD which could then pave the way for a run on stops resting above last week’s high at 1.1000.

But as long as we don’t see such a bullish reversal pattern, the near-term trend would remain bearish amid and overall positive environment for the US dollar that we have observed since the turn of the year.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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