The major currency pairs like the EUR/USD are expected to have a quieter week following last week’s central bank bonanza, although the USD/JPY and yen pairs are likely to be more headline-driven amid repeated verbal intervention from Japanese officials – we may even see actual intervention if the yen were to weaken significantly further. For everything else, much will depend on whether the US dollar will be able to hold onto its recent gains. Technical traders will be watching the EUR/USD as a gauge for the Dollar Index, and will be wondering whether the breakdown below the 200-day average was a temporary move, or one that has legs for the world’s most traded pair.

What will traders be watching this week?

A lot will depend on the direction of the US dollar this week, which will be tested with the release of the Fed’s favourite inflation measure on Friday, and some FedSpeak throughout the week.

Friday's key release is the US core PCE deflator for February amid a consensus for a 0.3% month-on-month reading, likely falling short of the Fed's disinflation narrative. Fed speakers include Christopher Waller on Wednesday and Chair Jerome Powell on Friday. Let’s see if they will address those strong early-year inflation prints and dismiss them again. In any case, I think the US dollar will struggle to keep pushing higher as we go deeper into the year, now that the Fed is getting ready to cut rates. 

Ahead of Friday’s PCE data, the US economic calendar for Thursday contains the Final Q4 GDP estimate, expected to remain unchanged at 3.2%, as well as jobless claims, Chicago PMI, pending home sales and revised UoM surveys. 

From the Eurozone, there isn’t much in the way of key data this week, but we have had German GfK Consumer Climate on Tuesday, which came in slightly better following the German Ifo survey the week before. Spain’s CPI came in hotter this morning at 3.2% vs. 2.8% previous. Looking ahead, we have retail sales from Germany on Thursday followed by French CPI and consumer spending data on Friday.

Last week saw the German Ifo survey come in ahead of expectations and showed its highest reading in 10 months. Following a rather harrowing year for the German economy in 2023, each positive data point from here on ought to be celebrated by euro traders. The Ifo index stands is a positive development, albeit much more is requisite to elevate the economy from its current nadir to a state of recovery.

Will the US dollar ease back?

Last week, the US dollar rose, even though the Fed was dovish as the FOMC maintained its projections of 3 rate cuts this year. Part of its support stemmed from increasingly dovish external factors, including the Swiss National Bank's surprise rate cut, as well as accommodative stances from the Bank of England and Reserve Bank of Australia. Declines in the yen, pound, franc, euro and the Aussie dollar further bolstered the dollar's recent rise, alongside encouraging US economic indicators such as PMIs, existing home sales, and unemployment claims. However, these macroeconomic releases are unlikely to deter the Fed from contemplating rate cuts starting in June, especially amidst subdued inflation.

After this week’s upcoming PCE inflation data, attention will turn to the Non-Farm Payrolls report and Consumer Price Index data in subsequent weeks. The March US data set for release in early April holds considerable sway over the dollar's trajectory. Weakness in these figures, particularly forthcoming inflation data, could precipitate a sustained decline in the dollar. 
 

EUR/USD technical analysis and trade ideas

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The EUR/USD has not fallen significantly further yet after breaking below the 200-day average (1.0835) on Friday. Let’s see if it will be able to reclaim the 200-day again. It would be a bullish outcome if it does.  If so, what the bulls need to see for confirmation is a break above the bearish trend line which comes in at around 1.0925 to 1.0950 area. 

On the downside, 1.0795 is now the next key level to watch. This was the most recent low that was formed at the end of last month. Ideally, the bulls will not want to see price go back below this level now. However, a clean break below this level could potentially pave the way for a larger drop towards 1.0700.

Given the overall positive risk environment, and the Fed’s strong indication that it will be cutting rates 3 times this year, I am leaning more towards the bullish EUR/USD argument than against it. With that in mind, a decisive move back above the 200-day could provide us with a decent bullish signal, especially if backed by weaker US inflation data on Friday. 

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