EUR/USD analysis: Focus turns to Powell as geopolitical uncertainty lingers

• EUR/USD analysis: ZEW improves for 9th consecutive month
• US dollar likely to remain supported on dips
• EUR/USD technical analysis point to oversold bounce but trend remains bearish

EUR/USD analysis video and insights on indices

The EUR/USD was off its lows at the time of writing in mid-day in London, supported by improving German investor sentiment data and mild profit-taking on long dollar positions. Rates held above the 1.06 handle as traders looked forward to Powell’s speech for clues on interest rates. But even if the EUR/USD were to rise a little bit more from current levels, the dollar is likely to find buyers on the dips, which should keep a ceiling on the exchange rate until there’s a fundamental shift in the dollar’s bullish direction.  We have a few US data releases to come this week and a speech by Powell later today, but the key data is the Core PCE index next week, which means there is plenty of time for the dollar to find fresh support. Until then, it is all about the ongoing Middle East concerns that is driving the markets and keeping the dollar higher on haven flows.

EUR/USD analysis: ZEW improves for 9^th consecutive month

Supporting the EUR/USD this morning was data showing German ZEW improved more than expected – this time printing 42.9 vs. 35.9 expected, improving sharply from 31.7 last.  The index has now stayed above the optimism level of 0.0 for 6 months in a row and beaten expectations in the past 9 consecutive months, despite hard data suggesting otherwise.

While the improvement in German investor data is a positive development for the euro, the stronger currency is the US dollar for now. With the Fed likely to keep interest rates high for longer and Middle East tensions unlikely to ease materially, this is likely to keep risk appetite low, and the dollar supported. Thus, the EUR/USD could remain under pressure for a while yet, even if today’s recovery extends a bit more.

US dollar likely to remain supported on dips

The spotlight will stay on the US dollar, as investors await a speech from Federal Reserve chairman Jerome Powell later today. His remarks may shed light on the trajectory of interest rates in the US. For now, the Dollar Index holds near its highest level in five months. On Monday, the greenback received further support from better-than-expected US data, with retail sales increasing by 0.7% month-on-month. The robust sales data underscores the unexpected strength of the US consumer market, which complicates the Fed's ability to enact rate cuts, and follows a third consecutive monthly increase in US CPI reported last week. We also have industrial production data coming up later, followed by the Philly Fed Index and Existing Home Sales on Thursday.

While a few US macroeconomic indicators are on the agenda for the upcoming week, the next major US data release is not expected until later in the month, with the Fed's preferred inflation gauge set to be published on April 26^th – i.e., Core PCE index. Until then, the dollar may find support on any short-term declines, especially considering that both US interest rates and those of other major economies, such as the ECB and the Bank of Canada, have recently taken a more favourable turn for the greenback. Additionally, the People’s Bank of China fixed the USD/CNY above the 7.10 handle, indicating that it was yielding to market pressure, allowing the renminbi to depreciate. This is only likely to add to the US dollar’s overall bullish tone.

As central banks like the ECB edge closer to potential interest rate cuts, possibly in June, the Federal Reserve's expected extended timeline has been a key factor driving the decline of the EUR/USD. This storyline could become even more significant if US data continues to demonstrate resilience. However, the primary focus for the EUR/USD and broader markets this week stems from geopolitical tensions involving Iran, Israel, and their respective allies. On this front, Israel's war cabinet has not yet announced what it plans to do following Iran’s retaliatory attack at the weekend, although the military chief of staff has said the attack will not go unanswered.

EUR/USD analysis: Technical level and factors to watch

Source: TradingVIew.com

Prior to today’s modest bounce, the EUR/USD had fallen for 5 days straight. It was looking a little oversold, so a bit of short-side profit-taking that we are observing now should not come as major surprise. Still, the upside could be limited. Key resistance is seen between the 1.0695-1.0725 area, which was significant support in the past. The directional bias would remain bearish below here, even if we see the recovery extend a little further from here. The next downside target below 1.06 handle is the key 1.05 barrier.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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