EUR/USD Analysis: Warning Of Oversold Levels

Warning of potential oversold conditions as pair hits 1.0722. Bearish trend persists amid US dollar strength and robust economic data, with focus on psychological support and resistance levels.

  • Last week's trading was generally bearish for the performance of the price of the Euro currency pair against the US dollar “EUR/USD”.
  • With losses that extended to the support level of 1.0722, the lowest for the most famous currency pair in the Forex market in two months.
  • Technically, the week's trading closed stable around the level of 1.0785, as the US dollar is still gaining momentum from the continued tightening of the bank's policy.
  • The US Central Bank and the positive results of US economic data, most notably the recent Labor market figures. 

(Click on image to enlarge)

EUR/USD Analysis Today - 12/02: Warning of Oversold Levels (Graph)

In general, the euro is considered among the currencies most vulnerable to the continued strength of the US dollar. However, the prospect of continued US economic strength opens the door to an extended period of outperformance for the dollar, according to global investment bank Standard Chartered. In response to strong US jobs data for January, analysts at Standard Chartered say that previous expectations of a gradual or rapid easing of demand are now in question, and there is a risk that the incoming data also trumps the upside. 

In this regard, Steve Englander, head of Forex research at Standard Chartered Bank, says: “A cyclical or structural rise in US activity would justify the clear and prolonged strength of the US dollar.” The possibility of this scenario has increased.” He added, "Given the size of the US non-farm payrolls shock, we believe that it will require either a surprise of the same size in the opposite direction or the accumulation of softer data to reverse the impact." 

Recently, it is expected that the US dollar exchange rates will rise if the incoming data reinforces the signal sent by the latest US jobs report. 

 

Which Currencies are Particularly Vulnerable to a Prolonged Period of Dollar Strength? 

The analyst says in this regard, “The currencies that we see as most at risk are those whose central banks may face pressure to mitigate inflation or activity, regardless of the Fed’s position.” Standard Chartered considers the euro, Canadian dollar, and franc to be most at risk if their economic data surprises to the downside. Currently, bond yields appear to have risen across the G10 sector following the US non-farm payrolls data as investors bet that interest rate cuts from the US central bank will be delayed elsewhere. 

Ultimately, most global central bankers will feel more comfortable taking a cue from the Fed to avoid first-mover attention. Moreover, some G10 central banks may have no choice but to cut rates before the Fed does if domestic data disappoints and US data remains strong. 

On the Eurozone economic side, Germany reported that industrial production fell by -1.6% for December compared to expectations for a 0.4% decline, while November's decline was revised to show a 0.2% decline compared to a previously reported 0.7% contraction. According to ING Bank, “The sharp decline in both exports and imports, as well as industrial production today, not only demonstrates the weakness of the backbone of the German economy, but also increases the risk of a downward revision of GDP growth in the fourth quarter.” Added, “The recent increase in industrial orders has brought at least some ambiguous light at the end of what increasingly looks like a very long tunnel,”. 

 

EUR/USD Technical Analysis and Forecast: 

According to the performance on the daily chart above, the general trend of the EUR/USD pair is still bearish, and as we mentioned before, moving below the psychological support level of 1.0800 will support the bears to move further downward. Moreover, the technical indicators will not move towards strong saturation levels for selling without moving towards levels. Support is 1.0700 and 1.0635 respectively. On the other hand, over the same period, there will be no reversal of the current downward trend without moving towards the psychological resistance level of 1.1000 again. Today, the economic calendar is devoid of important and influential data from the Eurozone or the United States of America, and therefore I expect calm movements for the Euro/Dollar pair today. 


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