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EUR/USD Analysis

• US dollar factors continue to dictate terms for the EUR/USD pair.
• Mixed signals from ECB speakers highlight uncertainty.
• The rising wedge remains relevant on the 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 US. Average earnings surprised to the upside, which could contribute to sustained inflationary pressures.

Many things have been moving in favor of the euro without pertaining directly to the actions within the Eurozone, such as the easing of COVID-19 restrictions in China, a dovish Jerome Powell, weaker gas prices, and fading inflation in the US. 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 have 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 54 bps increment for the December meeting.

ECB Interest Rate Probabilities

Source: Refinitiv

From an energy perspective, the Eurozone has benefited from a reduction in natural gas prices (Dutch TTF), allowing businesses to exploit lower input costs and see improved sentiment from both consumers and businesses. Next week’s economic calendar is relatively light compared to last week, but it does include the ISM services data for the US.

With the US 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 US dollar 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

IG client sentiment data shows retail traders are currently short on the EUR/USD currency pair, with 58% of traders holding short positions as of this writing. At DailyFX, we typically take a contrarian view to crowd sentiment, thus resulting in a short-term bullish bias.

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