Euro to US dollar analysis: EUR/USD is the Currency Pair of the Week

• Euro to US dollar analysis: EUR/USD outlook in focus ahead of busy week
• Key macro events to watch include Global PMIs, ECB rate decision and US GDP
• EUR/USD key resistance area between 1.0600-1.0640 being tested

Sentiment remains bearish towards risky assets, with global indices continuing to fall at the start of the new week following a tumultuous and eventful last week. Interestingly, the US 10-year bond yield has now broken above the key 5.00% level for the first time since June 2007, which could keep the downside limited for the US dollar. The EUR/USD was flattish on the session at the time of writing, ahead of a busy week.

Price action at the start of this week mirrors thar of last week when global financial markets came under intense pressure. The situation in the Middle East remains a big concern for investors, compelling investors to remain defensive. Gold is holding onto much of its recent gains, despite the fact yields are breaking further higher, which, under normal circumstances, would discourage gold bulls. Interestingly, the EUR/USD was not coming under much pressure either, probably because of the fact that yields in the Eurozone also rose along with the those of US debt.

Continued expectation of a prolonged period of elevated interest rates from the Federal Reserve, aimed at managing the persisting inflationary pressures, is something that could see the dollar make a comeback after the reserve currency gave back some ground last week against the likes of the euro and pound.

But Fed Chair Jerome Powell hinted last Thursday that the Fed is inclined to maintain the status quo during its next meeting and keep policy restrictive for a lengthy period of time. A lot will now depend on the outcome of data, which should dictate how the Fed will proceed moving forward.

The US macro calendar is quiet today but do keep an eye on the bond yields which continue to creep higher and higher. Further potential strength in yields could provide the dollar renewed strength.

Euro to US Dollar analysis: EUR/USD outlook in focus ahead of busy week

Despite the instability observed in the stock market and the upward trajectory of US 10-year bond yields, now above that critical 5% level, the EUR/USD has remained relatively stable over the past few weeks. Investors may be wondering how much of the Fed’s hawkish stance is priced in for the dollar, but that doesn’t explain why the greenback has risen further against most other currencies and why the euro is holding its own so well against most major currencies. It could be that investors are just simply waiting for the outcome of this week’s significant macro events before committing.

On that note, we have several crucial economic data releases to look forward to this week. Of particular significance are the Global PMIs scheduled for Tuesday, the ECB’s policy decision and US Advance GDP estimate, both on Thursday, and core PCE price index on Friday. These events will likely shape the market sentiment and impact the EUR/USD trajectory, with market participants closely monitoring the economic indicators for insights into the potential direction of the currency pair.

Global manufacturing and services PMIs

Tuesday, October 24

All day

The PMI data has been consistently very poor throughout much of this year, correctly highlighting a challenging macro backdrop with stagflation and high interest rates holding back the developed economies, most notably the Eurozone. Add the raised geopolitical risks to the equation, sentiment in the services sector is likely to have remained downbeat in October. The PMI is a leading indicator of economic health as purchasing managers possibly hold the most current and relevant insight into the company's view of the economy. Unless we see a surprise improvement in the PMI readings for the Eurozone, expect the pressure to remain on the EUR/USD.

ECB policy decision

Thursday, October 26

Following the ECB’s September meeting, the central bank made it clear that they won’t be hiking rates in October, as the central bank will want to get fresh information on Bank Lending Survey, Q3 GDP and a new round of staff projections. But soft data and the flare up in Middle East tensions have made it even easier for the ECB to pause its hiking. So, the focus will be on clues about the ECB’s December meeting, and beyond. All told, we don’t expect to see any support coming for the euro from this meeting.

US Advance GDP estimate

Thursday, October 26

We will have lots of important data from the US this week, including PMIs from the manufacturing and services sectors (Tuesday), GDP (Thursday) and Core PCE Price Index (Friday). Among these, GDP is likely to garner most of the attention as investors assess the likelihood for one more rate increase from the Fed. If GDP and most other US macro pointers in the week come in higher, then at the very least it would boost the “higher for longer” narrative, while data disappointment could finally send US dollar and yields lower.

Here's the full EUR/USD economic calendar for this week, containing the schedule for data release from both the US and Eurozone.

EUR/USD technical analysis

Source: TradingView.com

The EUR/USD has broken its bearish trend line but hasn’t shown any upside follow-through to appease the bulls. With everything going on, the lack of commitment from the bulls is hardly surprising, especially ahead of what will be a busy week for economic data.

Anyway, a clean break above the 1.0600-1.0640 resistance area is now needed before we are forced to drop our bearish view on the EUR/USD. Should rates climb above this area, then a short-squeeze rally could be the result.

On the other hand, if resistance continues to hold here, and rates go on to break back below short-term support at 1.0530, then that could pave he way for a breakdown of that key 1.05 handle.