Recovering from the wounds inflicted by the dovish ECB hike earlier in the day, the EUR/USD pair is currently trading above the 1.0650 level. Strong economic data and optimism surrounding China’s stimulus measures are contributing to the decline of the safe-haven US Dollar, thereby supporting the pair.

Bearish traders were given a fresh trigger when the very important 200-day Simple Moving Average (SMA) was broken for the first time in 2023 from a technical perspective. Additionally, the negative outlook for the EUR/USD pair is validated by the daily chart’s oscillators, which are securely situated in the negative territory and still have a long way to go before reaching the oversold zone.

The bearish outlook will be confirmed if the 1.0635-1.0630 area, which is a multi-month low from Thursday, sees continued selling. This will push spot prices down to the 1.0600 round figure. Once this level is convincingly broken, it will open the door for further decline towards the next important support at the 1.0525 area, which was the low on March 8th. The downfall will continue towards the 1.0500 psychological mark and eventually the YTD low, around the 1.0480 region that was touched in January.

Resistance is expected to arise near the previous monthly low, around the 1.0685 region, if the currency pair attempts to recover. If the EUR/USD pair manages to climb above the 1.0700 level, there could be a short-covering rally that lifts it towards the top end of the weekly range, near the 1.0765-1.0770 region. The pair will then face another obstacle near the 1.0800 level and the crucial 200-day Simple Moving Average (SMA) support breakpoint, which currently sits at around 1.0820-1.0825.

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EUR/USD Price Chart – Source: Tradingview
EUR/USD Price Chart – Source: Tradingview

If the current strength of the market continues and breaks through the established barrier, then we can expect prices to rise to the 1.0900 mark. This level is important because it aligns with the 100-day SMA and will limit any additional increases. If the market keeps buying, it will indicate that the pair has bottomed out, and traders with a bullish outlook will have a short-term advantage.

On the final day of the week, the EUR/USD pair saw some purchasing activity and partially reversed the previous day’s decline to reach a six-month low after the European Central Bank (ECB) announced its dovish rate decision. The ECB increased its primary rate by 25 basis points for the tenth time, raising it to an all-time high of 4%, to counteract stubbornly high inflation. The central bank’s accompanying monetary policy statement clearly indicated that the 14-month-long policy tightening cycle may have already peaked.

Moreover, the downward revision of forecasts for CPI and GDP growth for the following years – 2024 and 2025 – confirmed expectations that more rate hikes may not occur anytime soon. The markets responded quickly, and now the possibility of a rate cut during the first half of 2024 is factored in, which has put significant pressure on the shared currency.

The profit-taking around the US Dollar (USD), which is considered a safe-haven, has been prompted due to the risk-on impulse. The USD had recently rallied to its highest level since March. The EUR/USD pair has been assisted in edging higher as it heads into the European session on Friday. Investors have become optimistic after the People’s Bank of China (PBoC) reduced the Reserve Ratio Requirements for local lenders by 25 basis points, which is the second such move this year. This move is expected to release more liquidity and potentially shore up growth in the world’s second-largest economy, thereby easing recession fears.

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Investors’ confidence has been further boosted after China reported that Industrial Production and Retail Sales grew more than expected in August. However, the Greenback may continue to receive a tailwind due to the prospects of further policy tightening by the Federal Reserve (Fed), which could keep a lid on any meaningful recovery for the EUR/USD pair.

The upcoming Federal Reserve meeting is expected to result in no change to current policy, although the consistent stream of positive US macroeconomic data means that there is still a possibility of one more 25 basis point rate hike by the end of 2021. In August, the US Census Bureau reported that Retail Sales exceeded expectations by increasing 0.6%, up from the previous month’s revised 0.5% print. Moreover, the latest report from the US Bureau of Labor Statistics indicated that the US Producer Price Index (PPI) rose to 0.7% in August, up from the previous month’s 0.4% and the annual rate increased to 1.6%, surpassing the projected rate of 1.2% and the 0.8% increase in July.

Additionally, the latest US Initial Jobless Claims were slightly higher than expected, reaching 220K last week compared to the previous week’s 217K. These factors, as well as the persistently high consumer inflation revealed in the US CPI report released on Wednesday, will likely enable the Fed to maintain higher interest rates for a prolonged period.

The present fundamental scenario implies that the EUR/USD pair is more likely to move downwards. Any upward movement could still be considered as a chance to sell. The market is now waiting for ECB President Christine Lagarde’s upcoming speech to gain new momentum. Additionally, the release of the Empire State Manufacturing Index and Prelim Michigan Consumer Sentiment Index, as part of the US economic docket, could affect the USD value and create short-term trading opportunities. Despite this, the spot prices are heading towards registering a loss for the ninth consecutive week, and they appear prone to fall even further.

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