EUR/USD outlook: Markets not out of the woods yet

Market turbulence often presents lots of opportunities, but there is still excess froth to be shed as the unwinding of leveraged carry trades persists for now. The EUR/USD was trading lower along with gold and major European indices in the first half of Tuesday’s session. Although US indices, Nikkei futures, USD/JPY, and commodity-linked currencies—assets that had been under significant pressure—rebounded from their lows on Monday, the recovery didn’t gain much traction overnight, and so the underlying trend that has been dominant in the last few days seems to have resumed in the first half of Tuesday’s trading. This indicates that we might not be out of the woods yet, though conditions could stabilise as the week progresses. With a quieter US economic calendar ahead, there will be fewer new recessionary signals to unsettle traders, and the potential for supportive comments from Federal Reserve officials could ease market pressure. For now, the greenback has rebounded, helped in part by the stronger ISM services PMI. Still, in light of the recent events and expectations of a sharper pivot by the Fed than was previously expected, the EUR/USD outlook remains mildly positive.

Weaker Eurozone retail sales hurt euro

Today, the EUR/USD was actually trading lower and couldn’t extend its two-day rally. The euro was hurt by an unexpected 0.3% month-over-month decline in Eurozone retail sales. This has helped the dollar index recover from its multi-month lows.

Still, while the EUR/USD seems constrained at the moment, I believe that once the equity markets stabilise, we could see the euro and other major currencies strengthen more significantly against the dollar. The greenback has lost some of its yield appeal following a series of weak economic indicators pointing to a potential recession. Currencies where interest rates are much lower such as the yen, franc, and yuan have been among the major beneficiaries of a weakening US dollar so far. But that could well change.

EUR/USD technical analysis

Source: TradingView.com

The EUR/USD has hit resistance after trying unsuccessfully on Monday to stage a decisive breakout above the 1.10 handle. While it rose to its best levels since January, it then dipped on the back of the ISM services PMI data which came out stronger. It has since remained under mild pressure. Still, in light of the big drop in bond yields and expectations of a sharp pivot by the Fed, the EUR/USD outlook remains positive.

In terms of support levels to watch, the area near 1.0900 is the first line of defence for the bulls, followed by 1.0835, which will need to hold to maintain a bullish technical outlook on the EUR/USD.

In terms of upside hurdles, resistance is seen at 1.1000 which was tested on Monday and held firm. A break above it could pave the way for a run towards the prior highs of 1.1140 (December) and 1.1275 (last July).

The technical EUR/USD outlook has turned mildly bullish ever since it broke above its bearish trend line that had been in place since last July. Until something changes to suggest the bears are back in full control, the bulls will remain happy so long as we don’t break important support levels such as those mentioned above.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R