EUR/USD at the Dollar’s Mercy, 1.05 Still Key

EUR/USD ANALYSIS

• USD factors continue to dictate terms for EUR/USD.
• Mixed signals from ECB speakers highlight uncertainty.
• Rising wedge remains relevant on daily chart.

EURO FUNDAMENTAL FORECAST: MIXED

Friday saw the euro slip back below the 1.05 handle after better than expected Non-Farm Payroll (NFP) data which reinforced the tight labor market in the U.S.. Average earnings surprised to the upside which could contribute to sustained inflationary pressures. Much is going in favor of the euro that has not been as a direct consequence of actions within the eurozone but rather external factors including easing of COVID restrictions in China, a dovish Jerome Powell, weaker gas prices and fading inflation in the U.S.. This leaves the euro exposed to external factors and could bring the currency under pressure should the tide change.

Statements from the ECB’s De Guindos has proven more dovish than that of President Christine Lagarde. De Guindos has mentioned that although the eurozone will likely be hit by a recession, it won’t be as severe as previously expected. With regards to inflationary pressures, Q1 of 2023 is anticipated to ease which should weigh negatively on the euro. The weekend ahead will see the ECB President speaking once more and will likely see much of the same talk around fighting inflation whilst leaving a third consecutive 75bps interest rate hike as an option. As per the table below, money markets are currently pricing in a 54bps increment for the December meeting.

ECB INTEREST RATE PROBABILTIEIS

Source: Refinitiv

From an energy perspective, the eurozone has benefitted from a reduction in natural gas prices (Dutch TTF) allowing businesses to exploit lower input costs and improved sentiment from both consumers and businesses. Next week’s economic calendar is relatively light (see economic calendar below) compared to last week but does include the ISM services data for the U.S.. With the U.S. being a predominantly services dominated economy, this statistic is important to gauge the overall health of the economy. PPI will also be of importance as inflation has shown signs of decline across core PCE and CPI. Another slump in PPI will eat away at Powell’s prior ‘higher for longer’ narrative and add to USD woes.

EUR/USD ECONOMIC CALENDAR

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

EUR/USD WEEKLY CHART

Chart prepared by Warren Venketas, IG

The weekly EUR/USD chart above shows the current weekly candle trading marginally above the 200-day SMA (blue) for the first time since June 2021. This week’s close will be key for short-term directional bias. Should the weekly candle close above the 200-day SMA there could be scope for further upside.

EUR/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Daily EUR/USD price action reveals the rising wedge formation (black) still under consideration after the dollar strengthened post-NFP. This pattern will be invalidated should a candle close above wedge resistance but the recent euro rally could be faltering as the Relative Strength Index (RSI) approaches overbought levels.

Resistance levels:

• 1.0615
• Wedge resistance
• 1.0500

Support levels:

• 1.0369/200-day SMA
• Wedge support

IG CLIENT SENTIMENT DATA: BULLISH

IGCS shows retail traders are currently SHORT on EUR/USD, with 58% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a short-term bullish bias.

Contact and followWarrenon Twitter:@WVenketas