The euro has been following a moderately upward trend for 18 consecutive trading sessions. This recent movement raises the question: is this a mere correction in the broader downward trend that EUR/USD has been experiencing this year? The rate of appreciation for the euro remains notably sluggish, suggesting that the strength of this upward movement might not be robust. Historically, the most significant correction this year concluded exactly after 18 days, raising speculation about whether this upward trend might also end soon. The upcoming U.S. CPI inflation data on Wednesday might provide crucial insights into the future direction of the euro against the dollar, potentially clarifying if the current rise is sustainable or nearing its end.
The euro's price trajectory is still oriented upwards, but the momentum behind this rise is somewhat lackluster. Reflecting on the year’s previous major correction, there was a period where EUR/USD saw a substantial increase over 18 days, much more pronounced than the current situation. Observing the pattern that unfolded earlier in the year, one might wonder if, after another 18-day period of gains, we are approaching the end of this upward movement. The pattern suggests a periodicity in the euro's trading behavior, indicating that a reversal or slowdown could be imminent, especially if external economic indicators such as U.S. inflation data do not support a continued rise.
There are several indicators suggesting that the current upward correction in the euro’s value might not be sustainable and could soon reverse. The weak momentum, an overall downward trend in recent months, and indicators that are in overbought territory suggest negative divergence—essentially, the recent price increases are not supported by strong fundamentals. Technical analysis is leaning towards a prediction of a downward adjustment in EUR/USD rates, underlining the fragility of the recent gains. However, the outcome of upcoming inflation readings from the U.S. will play a pivotal role in determining whether the euro can sustain its recent rebound or if it will falter.
Despite numerous public appearances and comments by Federal Reserve officials, the EUR/USD exchange rate continues to exhibit relatively low volatility. This scenario persisted even as important economic data was released from the U.S. this week, which typically has the potential to stir significant market movements. The market's subdued response suggests that investors may be waiting for more definitive signals before committing to more pronounced shifts in trading strategies, highlighting the ongoing uncertainty and cautious sentiment prevailing in currency markets.
Recent data from the U.S. labor market has provided a mix of signals, complicating the outlook for monetary policy and economic expectations. The number of new unemployment claims rose unexpectedly to 231,000, significantly higher than anticipated and marking the highest figure since August of the previous year. This increase in unemployment claims, coupled with a rising four-week moving average, signals potential weaknesses in the labor market, which could influence Federal Reserve policies and, indirectly, the strength of the dollar against the euro.
In discussions about the Federal Reserve's future actions, comments from regional Fed presidents have been particularly enlightening. Mary Daly from the San Francisco Fed highlighted the ongoing restrictive stance of monetary policy, emphasizing the necessity for more time to achieve the Fed's inflation targets. On the other hand, Raphael Bostic of the Atlanta Fed has raised concerns about potential economic slowdowns, although it remains unclear when the Fed might adjust interest rates in response. These comments are critical as they provide insights into the internal thinking within the Fed, which could influence market expectations and the dollar's trajectory against other currencies.
Turning to the European Central Bank (ECB), recent minutes from their monetary policy meeting have shed light on potential future actions. The ECB appears ready to commence interest rate cuts as early as June if incoming data confirms their inflation forecasts from March. ECB officials noted that recent data align with their earlier projections, boosting confidence in the ongoing disinflation process. A confirmed rate cut in June seems highly likely, which would likely cap any significant and lasting appreciation of the euro against the dollar, as lower interest rates typically decrease a currency's attractiveness to investors.
Our comprehensive analysis, incorporating both fundamental and technical perspectives, suggests a cautious outlook for the euro. The upcoming U.S. inflation data could provide a surprise to the upside, potentially derailing the euro’s modest recovery. Additionally, expectations set by both the ECB and the Fed are likely to limit any significant upward movement in the euro exchange rate in the near term.
On the technical front, the pattern of an 18-day corrective rise observed earlier in the year, which subsequently reversed, could be indicative of a similar outcome now. This historical pattern, combined with current market conditions and negative divergence observed in technical indicators, leads us to recommend preparing for a potential short position in EUR/USD.
10.05.2024
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