Key Highlights
Dollar Gains: Significant monthly increase, influenced by strong U.S. data and Fed rate cut speculations.
Eurozone's Economic Stance: Stagnant growth in Q4 and ECB's tight monetary policy amid rate cut expectations.
Technical Analysis Insights: Bearish momentum for EUR/USD highlighted by key technical indicators, with pivotal points at $1.07 support and $1.09 resistance levels.
Market Snapshot
The dollar is heading for its most substantial monthly increase since September, as the EUR/USD has trended lower since the year's start, falling 2% and currently just above the $1.08 level.
The dollars gain against major currencies this month is attributed to adjusted market expectations regarding the pace of Federal Reserve rate cuts, influenced by strong U.S. economic data and central banker comments. Economic indicators, such as job numbers and consumer spending, have highlighted the resilience of the U.S. economy, contributing to the strengthening of the dollar.
Economic Drivers
Euro Area Growth Stagnates: The Euro Area avoided recession in Q4 with flat growth, outperforming expectations of a -0.1% contraction after a -0.1% decline in Q3.
Germany Avoids Technical Recession: Q3 GDP revisions allowed Germany to narrowly escape a technical recession, with Q3 GDP adjusted to flat from -0.1%. Q4 GDP showed a contraction of 0.3%, in line with forecasts.
European Central Bank Policy Meeting: The ECB's latest meeting emphasized continued commitment to tightening monetary policy to address inflation concerns. This stance is generally supportive of the euro but also raises questions about economic growth sustainability in the face of higher borrowing costs.
ECB Rate Cut Expectations: Market expectations suggest a 75% chance the European Central Bank will start cutting rates at its April 11th meeting, potentially reducing the Deposit Facility rate to 2.50% by year-end from the current 4%.
US Economic Data: The US has released a series of economic reports indicating strong economic performance, including job growth and retail sales. Such data supports the case of higher for long interest rates by the Federal Reserve, strengthening the dollar against the euro.
FED Rate Cut Expectations: Traders await the Federal Reserve's decision, hoping for signals on when rate cuts may begin. Financial markets see a 50/50 chance of a rate cut in March, with a cut fully priced in for the May 1st meeting. A hawkish surprise from the Fed could boost the USD, negatively impacting the EUR/USD.
Technical Overview and Key Levels
The EUR/USD pair has displayed a bearish trend since the beginning of the year, characterized by a structured decline on lower timeframes and navigating within a downward trend channel. Notably, the currency pair breached the 45-day exponential moving average (EMA) channel on the daily chart and is now nearing the 200-day EMA support level. A critical juncture for the Euro lies ahead as it approaches the $1.0750 to $1.0700 support zone, marked by the December low and the 200-day EMA channel.
Key resistance is firmly established at the $1.09 level, which has effectively rejected upward movements three times during January, reinforcing the bearish outlook as long as the pair remains below this threshold. Short-term resistance is identified at $1.0850, where a break above could potentially halt or delay the ongoing decline. On the contrary, a drop below the $1.08 mark could accelerate the bearish momentum, paving the way towards the key support area above $1.07.
EURUSD 4Hour Chart
Looking Ahead
Influence of Monetary Policy Divergence: Short-term trends for the EUR/USD will be shaped by Eurozone inflation figures, the health of the US labour market, and Federal Reserve policy decisions, with significant potential impacts from diverging monetary policies between the ECB and the Fed. A hawkish stance from the Fed, coupled with softer Eurozone inflation figures, might tilt the monetary policy divergence in favour of the U.S. dollar.
Federal Reserve's Upcoming Decision: The Fed is anticipated to keep U.S. interest rates steady, potentially signalling future cuts by altering its language on considering further hikes. The outcome of the Fed meeting is expected to significantly influence the EUR/USD rate, depending on the perceived likelihood of a March rate cut.
Pivotal US Jobs Report: Friday's US Jobs Report is crucial, with the unemployment rate anticipated to slightly increase to 3.8% and average hourly earnings expected to grow by 4.1% year-over-year.
The EUR/USD remains at the mercy of central bank policies, economic data releases, and global market sentiment. Investors and traders should monitor these developments along with any possible reaction at the key technical levels that could shape the market dynamics in the short term.
