EUR/USD Looks Defeated In the Face Of Increased U.S. Dollar Buying, Spanish Inflation Data Awaited
Key Takeaways:
- The EUR/USD cross extends losses for a second consecutive day, weighed by a stronger U.S. dollar
- A stronger U.S. dollar, supported by hawkish Fed bets, helps exert downward pressure on the EUR/USD pair
- Expectations of a June rate cut weigh on the euro, and help cap the upside for the major currency pair
The EUR/USD cross built on its mid-day bounce from the vicinity of the 1.08641 level touched on Tuesday and dropped below the $1.08300 mark on Wednesday during the Asian session as a stronger U.S. dollar weighed heavily on the major currency, limiting any meaningful gains.
The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, rose above the 104.400 mark on Wednesday, extending Tuesday’s sharp bounce from the vicinity of the 104.012 level. Increased bets that the Fed will have to wait further before cutting rates portrayed an optimistic view of the U.S. economy.
This comes after a U.S. Census Bureau report released on Tuesday showed new orders for manufactured durable goods in the United States rose by 1.4% month-over-month in February 2024, more than market expectations of a 1.1% increase and after a downwardly revised 6.9% fall in January. Excluding transportation, new orders increased by 0.5%. Excluding defence, new orders increased 2.2 percent.
This, along with the hot U.S. consumer and wholesale inflation readings combined with the tight U.S. labor market, suggests that the Fed might be forced to leave rates higher for longer to rein in inflation in the U.S.
In light of this, markets seem convinced that the Fed will leave rates unchanged during the May meeting. This was evident from CME’s Fed watch tool, which now shows Fed fund futures traders have priced in an 89.1% chance the Fed will leave rates unchanged at 5.25 – 5.5% during the May meeting, up from an 85.5% chance one week ago.
In contrast, the euro continues to be weighed by expectations of a June rate cut. In fact, the bets were raised after European Central Bank Governing Council member and Governor of the Bank of Estonia, Madis Muller, said on Tuesday that the central bank is getting close to a point where it can start cutting rates. Furthermore, ECB Governing Council member and Governor of the Bank of Greece, during an interview with Greek financial website Mononews.gr, said that consensus was building within the European Central Bank for a rate cut in June if inflation develops as projected.
As we advance, investors look forward to the eurozone docket, which will feature the release of the Spanish CPI (YoY) (Mar) data report. The main focus, however, remains on the release of the U.S. Core Personal Consumption Expenditure (PCE) data, the Fed’s preferred inflation gauge, set for Friday.
Technical Outlook: One-Day EUR/USD Price Chart
EUR/USD is trading with a mild-bearish bias below the $1.08300 mark following an extension of the rejection from the 20-day (blue) Exponential Moving Average at the 1.08631 level. Some follow-through selling would drag spot prices toward the immediate support (lower limit of the Bullish Symmetrical Triangle chart pattern). A subsequent break below this key support level will negate the bullish outlook and prompt aggressive technical selling around the EUR/USD pair. The next support level is seen at the technically strong 200-day (yellow) EMA level at 1.08024, below which EUR/USD could turn vulnerable to a drop toward the 1.07979 level (S1), followed by the 1.07215 level (S2) and in extreme bearish cases, EUR/USD could extend a leg down toward the 1.06587 crucial support level.
On the flip side, if dip-buyers and tactical traders jump back and trigger a bullish reversal, initial resistance comes in at the 50-day (red) EMA level at 1.08556. Acceptance above this level, followed by a move above the 20-day (blue) EMA level at 1.08631, would pave the way for an ascent toward the 1.08658 level (R1). A decisive move above this hurdle will reaffirm the overall bullish outlook and pave the way for an accelerated rise toward the 1.08870 level (R2) en route to the key resistance level (upper limit of the Bullish Symmetrical Triangle chart pattern).
