The EUR/USD exchange rate hit a six-week high in recent trading. Although it is faltered by resistance on the charts, the single European currency could remain supported in the coming days due to a faltering US dollar and more accommodative Chinese monetary policy. The European single currency surged to its highest level since opening days in July last week after a batch of numbers from the Bureau of Labor Statistics indicated that significant moderation in inflation pressures in the US may have started making its way through the pipeline last month.

• The EUR/USD pair’s gains stopped at the resistance level of 1.0368, and then quickly returned to decline amid profit-taking sales, to reach the support level 1.0160 at the time of writing the analysis.
• The euro recovered its strength around 1.0361, which closely coincides with the 55-day moving average and the 61.8% Fibonacci retracement of the June decline from levels above 1.06.
• The euro still holds many of its weekly gains.

Commenting on the EUR/USD performance, Sean Osborne, Senior FX Analyst at Scotiabank said, “We are looking for EUR/USD to fund support at 1.02 higher in the near term. Growth/recession/energy supply concerns remain a threat to the euro outlook.”

The Euro may benefit this week from the surprise decision of the People’s Bank of China on Monday to cut interest rates if the People’s Bank of China (PBoC) allows the devaluation of the floating RMB in order to support the domestic economy. “The People’s Bank of China (PBoC) unexpectedly lowered the one-year medium-term lending facility rate by 10 basis points to 2.75%,” says Carol Kong, currency analyst at the Commonwealth Bank of Australia. “The announcements came amid much weaker-than-expected data on credit growth and activity in July,” he added, after they warned that euro/dollar risk is likely to be tilted to the downside.

Sometimes a depreciation of the renminbi has the effect of pulling other currencies on its side, and when that happens it can prevent the slower Chinese currency and “lower beta” from declining in aggregate or trade-weighted terms, necessitating intervention wherever the actual target is.

Much depends on whether the People’s Bank of China (PBoC) wants the currency to depreciate, but in this kind of scenario the euro could benefit as it represents one fifth of the trade-weighted renminbi, making it a prime candidate for a supportive offering from the world’s largest manager of currency reserves. “We were particularly surprised by the weak retail sales, as we thought China should deliver an additional month of modest monthly growth given the support of some big ticket purchases,” says Craig Botham, chief China economist at Pantheon Macroeconomics. “There is likely to be a renewed rush in Covid cases and a tightening of zero Covid restrictions, but we believe weak underlying demand is the main problem,” Bothham wrote in response to Monday’s rate cut.

Putting renminbi matters aside, much about the outlook once again hinges on the dollar, which is likely to be highly sensitive to the results and impacts of plentiful economic data due to be released from the US over the coming days. So says Pooja Sriram, an economist at Barclays. “Although the sudden slowdown in inflation in July may lead to debate over whether to move to an increased pace of increases, the latest Fedspeak release indicates that it is still too early to expect a meaningful shift in price policy.”

Important events this week

The release of US retail sales on Wednesday and the minutes of the Federal Reserve’s meeting in July are the most important events of this week for the US dollar. They are not likely to have a significant impact on the US interest rate policy outlook, but they may affect the outlook for the economy. It is also likely to support the euro and other risky currencies; especially in light of recent indications that inflation in the US may be moderate.

However, along the way, the market is also likely to pay close attention to the Eurozone employment figures for July, which will also be released on Wednesday and will influence perceptions of the outlook for Europe’s economies and European Central Bank (ECB) policies. Typically, there will be room to move to the upside with conditions that remain high with uncertainty about the near-term outlook for growth in Europe due to lower natural gas supply.

Euro forecast against the dollar:

I still expect that the euro’s gains against the dollar EUR/USD will remain a target for selling, as the divergence in economic performance and the future of monetary policy tightening is still in favor of the US dollar’s ​​strength in the end. According to the current performance, breaking the 1.0120 support will support expectations of moving towards the parity price and below it. On the other hand, according to the performance on the daily chart below, the movement of the bulls towards the resistance levels at 1.0320 and 1.0400 will be important to change the general trend to the upside.

Today, the EUR/USD will react to the ZEW release of German economic sentiment, US housing, and industrial production data.

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In the same trading path for the past week, the price of the EUR/USD currency pair is moving during this important week’s trading. This is amid strong bearish momentum, which moved on its impact towards the 1.0396 support level. It settled around the 1.0450 level at the time of writing the analysis, before announcing the reading of the ZEW index of German economic confidence. The euro tumbled due to a toxic mix of domestic and international headwinds but will likely remain under pressure in the coming days if US bond yields and the US Federal Reserve’s policy outlook continue to dampen risk appetite.

The currency pair’s struggles increased in the forex market after US inflation figures surprised to the upside expectations for the month of May on Friday and prompted the market to revise its expectations for US interest rates in the coming months. That data lifted US bond yields and dollar exchange rates while fueling an early selloff in global stock markets that weighed heavily on many currencies, although the Euro was also struggling in the wake of last week’s historic European Central Bank decision.

The euro was unable to capitalize when the European Central Bank said last Thursday that it would start raising interest rates in the euro zone in July and that it expects to raise borrowing costs in a sustainable manner over the coming months. Many analysts say this reflects market concerns about higher rates. It means the bond markets in southern Europe. The European Central Bank also announced a plan to use the reinvestment of the €1.85 trillion bond portfolio obtained through the Pandemic Emergency Purchase Program in order to prevent disproportionate and destabilizing increases in financing costs for the most financially fragile eurozone members.

This has done little to prevent markets from expressing their concerns about how southern European economies and bond markets will perform as interest rates rise in the bloc, and these kinds of concerns tend to weigh on the euro, which may now be more likely to strengthen the dollar. Commenting on the outlook, Silvia Ardajna, chief European economist at Barclays, said, “The risk of a repeat of a summer like 2011 has increased as the market may want to find out more about conditions (spread levels and growth velocity) that the ECB may view as weak in monetary policy transmission.”

According to the technical analysis of the pair: The general trend of the EUR/USD pair is to the downside and the breach of the support 1.0400 supports a stronger control of the bears on the trend. Currently, the closest trend targets are the support levels 1.0380 and 1.0290, those levels are sufficient to push the technical indicators towards strong oversold levels from which one can think of buying opportunities. The EUR/USD currency pair may remain under downward pressure until the US Central Bank’s monetary policy decisions are announced tomorrow.

On the upside, the breach of the 1.0600 and 1.0755 resistance levels will have an impact on the bulls’ sentiment for the move.

Recently, the monetary policy officials of the European Central Bank increased the talk about the most appropriate time to raise interest rates to keep pace with the path of the rest of the global central banks. It is led by the US Federal Reserve to contain the hyperinflation caused by the epidemic and most recently the Russian / Ukrainian war. Accordingly, the EUR/USD currency pair found an opportunity to correct upwards to the resistance level of 1.0600, with a correction from its lowest level in five years. The currency pair is waiting for more momentum to move further out of the sharp descending channel.

Overall, the European Central Bank is moving towards a rate hike and the market is now considering the possibility of a massive 50bp hike in July, a development that could not be understood just weeks ago. The turnaround provided support for the Euro, especially against the British Pound which at the same time saw the Bank of England decline against market expectations of a series of rate hikes. “Relative rates have supported the pound against the euro for some time but not anymore with markets pricing in ECB rate hikes,” says Mikael Milhaug, senior analyst at Danske Bank. “Looking ahead, relative prices appear to be more supportive for the EUR/GBP.”

The minutes of the European Central Bank’s April monetary policy meeting were released last Thursday and showed that Governing Council members were concerned that the rise in inflation expectations could become “disorderly”. This describes a scenario that was an inflationary shock – in this case through higher energy and commodity prices – becoming embedded in the broader economy.

For example, through companies that raise the prices of goods and services, while employees can demand higher wages. Some Council members believed that the ECB could not wait for real wage developments to confirm rising inflation expectations and the time for rate hikes was fast approaching. “European Central Bank members continued to send hawkish signals, clearly leading the market to risk a 50 basis point rate hike in July,” says Jan von Gerrich, chief analyst at Nordea Markets. The decisions are made by the hawks of the European Central Bank. The ECB’s April meeting minutes just confirmed that hawks are increasingly gaining the upper hand in the discussions. The interest rate hike in July is no longer uncertain, the only uncertainty is whether it will be 25 basis points. or 50 basis points.”

In this regard, Dutch Central Bank Governor Claes Knott said in a recent interview that the European Central Bank should raise its key interest rate by 25 basis points in July, but it should not rule out a larger increase. “A larger increase should not be ruled out,” Knott said. “The next logical step would be half a percentage point.”

Nordea notes that market prices are now within 35 basis points of the highs that fell at the July meeting. A 50 basis point rise was unimaginable just weeks ago, and from a currency perspective, a lot depends on whether or not the ECB is meeting market expectations. For example, if the European Central Bank pushes this rate back, the euro will be responsible for giving back value to the British pound, the dollar, and other countries. (It can also be assumed that he has recently found momentum in support of rate hike expectations.)

If the European Central Bank validates this forecast and delivers a 50 basis point rise with its pointer to the possibility of further rallies, the EUR could gain value. The European Central Bank has consistently insisted that it only intends to normalize monetary policy gradually, and large 50bp hikes appear to be inconsistent with this guidance.

According to the technical analysis of the pair: Despite the recent rebound attempts of the EUR/USD currency pair, the general trend is still bearish. It is necessary to move strongly upwards to change, and the real reversal may occur, according to the performance on the daily chart below, by moving towards the resistance levels 1.0795 and 1.1000. In return the bears have the opportunity to return to the launch if the EUR/USD pair returns below the 1.0440 support level. The euro is awaiting the announcement of the important German Ifo number today and the German Central Bank report, amid a complete absence of important US economic data.

The EUR/USD exchange rate was unable to escape from the bottom of its recent low and entered the new week’s trading at the risk of further losses. The losses could see the single European currency slide towards some of its lowest levels since the first half of 2017 throughout the year during upcoming days. With the beginning of this week’s trading, the price of the EUR/USD pair moved in a range between the level of 1.0494 and the level of 1.0593 in the same ranges of the last trading sessions.

The Euro’s recovery has been attempted repeatedly last week as well as on Friday before the weekend with data from European Central Bank policy makers indicating that the timing of an initial rate hike in the Eurozone is likely to approach. European Central Bank Governing Council member Francois Villeroy de Gallo said on Friday that Frankfurt could raise the negative deposit rate of -0.5% “to positive territory” by the end of the year, while Executive Board member Isabel Schnabel suggested on Monday that the initial rise It may come as soon as July.

However, the EUR/USD exchange rate was unable to withstand any of its attempts to recover, and it may now be at risk of extending its recent streak of losses with a break below the 1.05 level over the coming days.

Juan Manuel Herrera, strategist at Scotiabank says: “There are few notes on the eurozone calendar over the next two weeks other than speeches from the European Central Bank, but markets seem to be in a safe place for the ECB’s price bets.” He added, “The technical picture for the euro continues to indicate more losses to the 1.04 level, after the consolidation period that lasted seven sessions. The analyst warned that the euro’s trading (mostly confined between 1.05 and 1.06 levels) helped it out of the oversold area on the RSI.

The euro’s ability to recover against the dollar has been hampered by rising US bond yields and economic risks associated with the currently stalled EU push towards a Russian oil embargo, although the single European currency faces other fresh and headwinds this week as well. This comes after it was widely reported that Chinese Prime Minister Li Keqiang called for intensified efforts by the authorities to save jobs and support families, while battling the repercussions of measures to contain the Corona virus in major urban centers, including Shanghai and Beijing.

“The employment situation is deteriorating along with the rest of the economy,” says Craig Botham, chief China economist at Pantheon Macroeconomics. All April PMIs point to high unemployment, despite government promises to support companies affected by the zero-Covid-19 policies.

The deteriorating economic background and the government’s increasing willingness to support Chinese growth pose downside risks to the renminbi and upside risks for the USD/CAD pair, which in turn indicates continued headwinds for many other currencies relative to the US dollar including the euro. To the extent that these factors add more to the baggage around the ankles of the euro against the dollar, it may be enough to see the euro drop below the 1.05 level and towards the 2017 lows around 1.0344 during the opening phase of the week’s trading.

According to the technical analysis of the pair: There is no change in my technical view of the price performance of the EUR/USD currency pair. The general trend is still bearish, and a breach of the 1.0500 support will increase the bears’ control over the trend, and therefore move towards stronger support levels and the closest ones after that 1.0435 and 1.0300, respectively. As mentioned before, continuing weaknesses – divergence in economic performance, the future of central bank policy tightening and the Russo-Ukrainian war support the current trend. On the upside, without breaching the resistance levels 1.0795 and 1.1000, the general trend of the EUR/USD will remain bearish, and the currency pair will be affected today by the announcement of the German ZEW index reading.

Eurodollar Outlook: HSBC cut its forecast last week and now expects the euro to reach $1.03 by the end of June and parity in the first months of next year.

The market has recently been consolidating, and now it looks as if we have finally run out of momentum.

The DAX fell on Wednesday to break through a support level at the €14,250 level. This is a very negative turn of events, and it does suggest that perhaps the DAX is ready to fall further. In fact, if we break down below the lows of the session on Wednesday, I suspect that there will be a fresh wave of selling, especially if the €14,000 level gets broken through.

Looking at this chart, you can see that the 50-day EMA has offered resistance over the last 48 hours, and now it looks like we are going to follow right along. Breaking through the €14,000 level opens up the possibility of a move to the €13,500 level, and then even €13,000. This is a market that had recently bounced quite viciously, but the fact is that some of the most vicious rallies occur during bear markets, and that might be what we have seen just happened.

If we rally from here, then I believe that the 50-day EMA, currently sitting at the €14,565 level, will drop significantly. At this point, I believe that should be dynamic resistance, and it should be perceived as such. The 50-day EMA being broken allows for the market to go looking to reach the €14,900 level. That being said, the market is going to come into contact with the 200-day EMA at that point, so even then I think it is probably somewhat limited to the upside.

For what it is worth, it looks as if stock markets around the world have fallen quite significantly, and I do think that it is probably only a matter of time before other indices propel the DAX lower. The market has recently been consolidating, and now it looks as if we have finally run out of momentum. In the short term, it is very likely that we will continue to see noisy behavior, so I would be cautious about my position size, considering that the market can swing quite viciously, especially as there are so many geopolitical issues, as well as the concerns about energy in the European Union. The German GDP numbers have recently been revised lower as far as estimates are concerned, and that has expectations of German performance going lower.

Germany, UK considering further lockdowns; Eurozone economy improving, though worse than expected.

According to Germany’s Federal Statistical Office, retail sales rose by 5.6% (annually) in November, higher than expectations of 3.9% but lower than the previous month’s 8.6% rise. In monthly terms, retail sales rose 1.9% in November, lower than October’s 2.6% rise but significantly higher than forecasts of a 2% decline.

The Federal Statistical Office linked the expansion with a surge in online sales and home improvement spending.

Retail sales are set to grow by 4% this year, despite the disastrous effects of the pandemic on economic activity. This is good news for Germany, which currently struggles with the spread of the virus.

In order to curb the spread of the virus, the German government has been considering extending the national lockdown by three weeks. The majority of Germany’s states already agreed to impose this measure, which is set to be announced on Tuesday after a meeting with Chancellor Angela Merkel.

Since mid-December, schools, stores and services have been closed due to COVID-19, which has infected 1,796,216 individuals and killed 35,632. With the new measures, restrictions would end on January 31^st instead of January 10^th.

According to recently released data, employment ended a 14-year gaining streak as it fell by 1.1% year-on-year, the sharpest decline since 1993. Markit Economics reported a slower expansion in the manufacturing sector in December, as the Manufacturing PMI stood at 58.3 after being at 58.6 in the previous month.

German Chancellor Angela Merkel recently concluded the Comprehensive Agreement on Investment with China, which would further improve the economic relationship between both countries. The decision was made despite President-Elect Joe Biden’s requests, as the agreement would make it harder to align the European Union’s policies with those of the United States.

Economic Calendar

With the New Year holiday last week, there were no data regarding the European economy.

This week, Markit Economics reported that the European Union’s manufacturing sector expanded less than expected, with a Manufacturing PMI reading of 55.2, less than the previous month’s 55.5. Predictions were that it would remain unchanged.

Euro Recovers

So far this week, the euro has gained 1.21% against the US dollar, breaking a two-week losing streak. It also managed to recover against the pound sterling, advancing by 1.88 percent and breaking a three-week losing streak.

The euro’s recent gains can be linked to the UK’s decision to impose another lockdown due to the uncontrolled spread of a recently identified strain of COVID-19. This fall offset sterling’s gains from a post-Brexit trade deal.

“Sterling lost ground against the euro yesterday as the market reacted poorly to the prospect of a third national lockdown in England,” explained an analyst at Caxton FX. “With Brexit now out of the way, the economic backdrop will be a more significant driver of the pound both today and in the coming months.”

The European Central Bank, which is now amid an ongoing policy review, provided additional stimulus in December, expanding its emergency bond purchases program by 500 billion euro. ECB Governing Council member Pablo Hernandez de Cos called the Bank’s governing board to explore other options that could help reduce the volume of bond purchases.

“I think yield curve control is an option worth exploring,” de Cos commented. “The experience of these central banks suggests that, if sufficiently credible, yield curve control allows the central bank to achieve a yield curve configuration with a lower amount of actual purchases, hence enhancing efficiency.”

Eurozone Economy Worse Than Expected, Though Improving

Since our last report, the Eurozone growth data has remained unchanged. Inflation remained in line with analysts’ expectations, though way below the ECB’s target. The latest unemployment level signals a slight decline in the labor market at 8.4% after being at 8.3% in September.

According to a poll of economists led by the Financial Times, analysts expect the Eurozone economy to rebound by 4.3% this year. This figure heavily contrasts with the International Monetary Fund’s projection, which stood at 5.2%.

In terms of unemployment, analysts are more pessimistic with predictions of over 10%, significantly higher than the last reading.

Upcoming Events

• Tomorrow, IHS Markit will release both the Composite and Service PMIs for the Eurozone.
• On Thursday, retail sales data is expected to be published.
• Also on Thursday, the Consumer Price Index, business climate and industrial confidence data will be released.
• On Friday, November’s unemployment data will be released.