Key Highlights
Dollar Gains:
Significant monthly increase, influenced by strong U.S. data and Fed rate cut
speculations.
Eurozone’s
Economic Stance: Stagnant growth in Q4 and ECB’s tight monetary policy
amid rate cut expectations.
Technical
Analysis Insights: Bearish momentum for EUR/USD highlighted by key technical
indicators, with pivotal points at $1.07 support and $1.09 resistance levels.
Market
Snapshot
The dollar
is heading for its most substantial monthly increase since September, as the
EUR/USD has trended lower since the year’s start, falling 2% and currently just
above the $1.08 level.
The dollars
gain against major currencies this month is attributed to adjusted market
expectations regarding the pace of Federal Reserve rate cuts, influenced by
strong U.S. economic data and
central banker comments. Economic indicators, such as job numbers and consumer
spending, have highlighted the resilience of the U.S. economy, contributing to
the strengthening of the dollar.
Economic
Drivers
Euro Area
Growth Stagnates: The Euro Area avoided recession in Q4 with flat growth,
outperforming expectations of a -0.1% contraction after a -0.1% decline in Q3.
Germany
Avoids Technical Recession: Q3 GDP revisions allowed Germany to narrowly escape
a technical recession, with Q3 GDP adjusted to flat from -0.1%. Q4 GDP showed a
contraction of 0.3%, in line with forecasts.
European
Central Bank Policy Meeting: The ECB’s latest meeting emphasized continued
commitment to tightening monetary policy to address inflation concerns. This
stance is generally supportive of the euro but also raises questions about
economic growth sustainability in the face of higher borrowing costs.
ECB Rate Cut
Expectations: Market expectations suggest a 75% chance the European Central
Bank will start cutting rates at its April 11th meeting, potentially reducing
the Deposit Facility rate to 2.50% by year-end from the current 4%.
US Economic
Data: The US has released a series of economic reports indicating strong
economic performance, including job growth and retail sales. Such data supports
the case of higher for long interest rates by the Federal Reserve,
strengthening the dollar against the euro.
FED Rate Cut
Expectations: Traders await the Federal Reserve’s decision, hoping for signals
on when rate cuts may begin. Financial
markets see a 50/50 chance of a rate cut in March, with a cut fully priced
in for the May 1st meeting. A hawkish surprise from the Fed could boost the
USD, negatively impacting the EUR/USD.
Technical
Overview and Key Levels
The EUR/USD
pair has displayed a bearish trend since the beginning of the year,
characterized by a structured decline on lower timeframes and navigating within
a downward trend channel. Notably, the currency pair breached the 45-day
exponential moving average (EMA) channel on the daily chart and is now nearing
the 200-day EMA support level. A critical juncture for the Euro lies ahead as
it approaches the $1.0750 to $1.0700 support zone, marked by the December low
and the 200-day EMA channel.
Key
resistance is firmly established at the $1.09 level, which has effectively
rejected upward movements three times during January, reinforcing the bearish
outlook as long as the pair remains below this threshold. Short-term resistance
is identified at $1.0850, where a break above could potentially halt or delay
the ongoing decline. On the contrary, a drop below the $1.08 mark could accelerate
the bearish momentum, paving the way towards the key support area above $1.07.
EURUSD 4Hour
Chart
Looking
Ahead
Influence of
Monetary Policy Divergence: Short-term trends for the EUR/USD will be shaped by
Eurozone inflation figures, the health of the US labour market, and Federal
Reserve policy decisions, with significant potential impacts from diverging
monetary policies between the ECB and the Fed. A hawkish stance from the Fed,
coupled with softer Eurozone inflation figures, might tilt the monetary policy
divergence in favour of the U.S. dollar.
Federal
Reserve’s Upcoming Decision: The Fed is anticipated to keep U.S. interest rates
steady, potentially signalling future cuts by altering its language on
considering further hikes. The outcome of the Fed meeting is expected to
significantly influence the EUR/USD rate, depending on the perceived likelihood
of a March rate cut.
Pivotal US
Jobs Report: Friday’s US Jobs Report is crucial, with the unemployment rate
anticipated to slightly increase to 3.8% and average hourly earnings expected
to grow by 4.1% year-over-year.
The EUR/USD
remains at the mercy of central bank policies, economic data releases, and
global market sentiment. Investors and
traders should monitor these developments along with any possible reaction
at the key technical levels that could shape the market dynamics in the short term.