Euro to US dollar analysis: EUR/USD rebounds but downtrend prevails

• Euro to US dollar analysis: Stronger Eurozone industrial data unlikely to offer EUR/USD much support
• US housing market data and FOMC minutes up next  
• EUR/USD technical analysis still paint a bearish picture

The EUR/USD was a touch firmer in the first half of Wednesday’s session, finding support from a slightly positive tone in markets and surprisingly strong Eurozone industrial data. But with sentiment damaged by weakness in Chinese assets, and the dollar’s bullish trend gaining momentum in recent weeks, the path of least resistance remains to the downside for now. Investors are awaiting the release of some important US data and FOMC’s last meeting minutes later on in the day.

What is supporting the dollar?

Traders are struggling to find good reason to sell the dollar, apart from the fact it is starting to look a little bit overbought. The greenback continues to find support from several sources, not least rising real US bond yields – thanks to a more resilient US economy than expected. Tuesday’s release of stronger US retail sales data for July on Tuesday only helped to reinforce the view the US economy is holding its own relatively well in what should, in theory, be a challenging environment for the consumer faced with high inflation and interest rates. Fears over a hard landing have diminished, and now many analysts only expect to see the US economy experience a soft economic landing. Expectations that interest rates may have to remain high in the US for longer is what is helping to keep bond yields – and the dollar – elevated.

On top of that, this week’s mild risk-off tone hitting Chinese assets, copper and global equities has provided support for the dollar amid haven flows. Concerns about China and eurozone economies have helped to keep the euro undermined, thereby boosting the appeal of the USD against CNH and EUR.

Euro to US dollar analysis: Stronger eurozone industrial production offers hope

But this morning saw the euro find some mild support due to a slightly more stable equity markets and the fact we saw some better data out of the eurozone. Q2 GDP came in at +0.3% quarter-over-quarter, in line with expectations, while industrial production was surprisingly strong at +0.5% month-on-month in June vs. -0.1% eyed. The EUR/USD edged higher slightly.

But the more recent economic indicators have been far from convincing.

Domestically, the German economy is struggling. The nation’s economic ministry on Monday said: “…the expected cautious revival of private consumption, services and investment development are showing the first rays of hope, which are likely to strengthen over the course of the year. At the same time, the still weak external demand, the ongoing geopolitical uncertainties, the persistently high rates of price increases and the increasingly noticeable effects of monetary tightening are dampening a stronger economic recovery.”

Indeed, a leading survey of about 300 German institutional investors and analysts released on Tuesday revealed that current conditions have deteriorated further, even if they are less pessimistic about the future. The German August ZEW survey current conditions printed -71.3, its lowest level since October. A reading of -63.0 was expected compared to the last print of -59.5. A reading below zero indicates pessimism. So, the fact that we saw a negative seventy-one reading goes to show how pessimistic investors are, which bodes ill for the single currency. That said, there was some improvement in the Expectations index to -12.3 vs -14.7 expected and -14.7 last. However, it too continues to remain in negative territory.

US dollar analysis: Housing market data and FOMC minutes up next

The focus will turn back to US data in the afternoon. Here, July building permits are expected to rise by an annualized 1.47m unites compared to 1.44m new residential building permits issued in June. Housing starts are seen rising by 1.45m compared to 1.43m the month before. Both of these figures will come in at 13:30 BST. Later, at 14:15 BST, industrial production is expected to print +0.3% m/m vs. -0.5% previously. If these numbers are roughly in line, or better, then this should keep the dollar supported heading into the publication of the FOMC meeting minutes later at 19:00.

The minutes of the FOMC's last meeting will likely re-iterate the Fed's ongoing hawkish rhetoric, judging by the fact that recent comments from several FOMC officials have not been too dissimilar to pre-FOMC. This is therefore unlikely to provide any major headwinds for the dollar. Our euro to US dollar analysis is thus unlikely to change much.

EUR/USD technical analysis

Source: TradingView.com

The US dollar eked out a small gain on Tuesday, keeping its bullish trend alive ahead of the release of the FOMC meeting minutes. Correspondingly, the EUR/USD gave up its earlier gains to close flat, with the pair clinging onto the key 1.0900 support level. The EUR/USD then bounced back in the first half of Wednesday’s session as it traded in a narrow range ahead of the publication of US data (see above, for more).

Tuesday’s test of the key resistance around 1.0950, a previously support level, was met with mild selling pressure. So, the EUR/USD closed the session flat, leaving behind a doji candle on the daily chart. The doji is usually an indication of indecisiveness and usually occurs before the release of some important economic data.

While the slight stabilisation in the EUR/USD exchange rate is a welcome relief for the bulls, the recent bearish bias on this pair, combined with a weak macro picture, means that the path of least resistance is still to the downside. So, I wouldn’t be surprised if the sellers were to step in again and cause the pair to trend lower, breaking key support around 1.0900.  

The 1.0900 support level has held firm so far, but if it gives way on a closing basis then the July low at 1.0833 could be the next target for the bears, with the 200-day average being the subsequent target around 1.0785.

The bulls will want to see a higher high now before becoming confident that rates have bottomed. As a minimum, they want to see 1.0950 reclaimed on a closing basis, while a move above 1.100 would be more ideal. The most recent high comes in at 1.1065 and this level would be the line in the sand for many bearish speculators, I would imagine.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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