EUR/USD analysis: Euro undermined as dollar gains further ground

• EUR/USD analysis: Euro could find support from ECB pushback and data
• US data and FedSpeak in focus for the dollar
• EUR/USD technical analysis shows price testing a key area of support

Risk was off the menu in early European trade, as stocks and major FX pairs fell while the dollar rallied as investors reduced their March Fed rate cut expectations. The EUR/USD briefly hit a new 2024 low at 1.0874, falling beneath last week’s low of 1.0877, before bouncing off its lows a little.

EUR/USD analysis: Euro could find support from ECB pushback, data

The euro could climb back if ECB policymakers continue to push back against deep rate cuts in 2024.

ECB governing council member Robert Holzman said on Monday at the World Economic Forum in Davos, Switzerland, that there is a possibility of no rate cuts this year as he pushed back against expectations of an April cut.

On the data front, we had some stronger-than-expect numbers this morning.

The closely watched German ZEW economic sentiment indicator, which was expected to ease to below 12.0 from 12.8, instead climbed to 15.2. Surveyed German institutional investors and analysts were also responding more favourably again when rating their relative 6-month economic outlook for the Eurozone – the ZEW Economic Sentiment for the single currency block unexpectedly improved to 22.7 from 23.0.

Falling economic morale had been among the reasons why the German economy contracted by 0.3% in 2023. There are some talks that the Eurozone’s largest economy could face a two-year recession should inflation and high interest rates hold consumers and businesses back.

So, it is in everyone’s best interest that once is clear that inflation is back near normal levels, the ECB should not hesitate to cut rates sooner rather than later. On the inflation front, German CPI was confirmed at 3.8% in December, up from 3.2% in November. This was the second reading, but it nevertheless supports the ECB’s view that the right path toward the 2% target could be long and bumpy.

US data, FedSpeak in focus

For the EUR/USD, it is now going to be all about the US side of the equation and the direction of the dollar as we transition to the US session. As well as the release of several company earnings and the Empire State Manufacturing Index, we will have a speech by FOMC member Christopher Waller due at 16:00 GMT. The more significant US data is arguably Wednesday’s release of retail sales followed by consumer confidence data (UoM) on Friday.

Following strong CPI data last week and employment figures the week before, many analysts expect the Fed to delay the rate cut until after their March meeting. Yet, rates traders were almost convinced that the first cut would have actually come at the March meeting. Today’s the probability of a rate cut in March has fallen to around 70%, which helps explain the dollar’s strength.  

EUR/USD technical analysis

Source: TradingView.com

While the EUR/USD may have hit a new 2024 low, the year is only 2 weeks old. From the opening level of 1.1038, the EUR/USD has now fallen by about 160-off pips to its current low. If anything, this underscores the lack of any major moves so far in the year. Anyway, my point it not to get too bearish just because of today’s bearish-looking price action. Indeed, the EUR/USD is still clinging onto key support around 1.0845 to 1.0900 support area. This is where the 200-day sMA, the bullish trend line and prior support/resistance all converge in close proximity. Could we potentially see a bounce back from around the current levels? Meanwhile, resistance is now seen around 1.0935, the base of today’s breakdown. Thereafter, 1.10 is the next key levels. 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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