EUR/USD: High bar for US economic data creates asymmetric upside risks
- EUR/USD rebound stalls at resistance zone around 1.0800
- On a relative basis, eurozone economic data is surprising to the upside more than US data at rates not seen in more than a year
- With such high expectations for the US economy priced in, any disappointment could spark meaningful upside for EUR/USD
US and euro area economic outlooks diverge
When you look at the US dollar and euro in isolation, there’s a lot of good news priced into the former with a lot of pessimism priced into the latter, explaining why EUR/USD sits where it does on the charts. However, with those views firmly in entrenched, it’s now up to incoming data and news flow to continue fuelling the narrative, otherwise it risks sparking a reversal either by weakening the dollar or strengthening the euro, or both. We may be seeing the inception of such a move right now.
But with high expectations for the US economy comes increased risk of disappointment
While on a relative basis the outlook for the United States economy remains far stronger than that of the euro area, it’s obvious those expectations are slowly starting to shift. Eurozone economic data has been, on balance, surprising on the upside for much of the year, according to Citi’s economic surprise index, while net surprises in the United States have turned negative, falling to levels not seen since January 2023.
When looking at the difference between the scores of the two regions, positivity has swung sharply in favour of the euro area, a performance in stark contrast to the middle of 2023 when data from the continent was disappointing relative to the US at rates not seen outside of crisis periods such as the pandemic and GFC.
Source: Refinitiv
With such a high bar for US data to impress relative to that from the eurozone, this trend could easily extend further, providing a potential catalyst to spark further upside for EUR/USD.
EUR/USD bulls battling bears around resistance zone
If that is to take place, EUR/USD needs to clear a stubborn resistance zone located around 1.0800, coinciding with the intersection of horizontal resistance with the 50 and 200-day simple moving averages. Attempts to break this zone have been thwarted over the past fortnight, underlining its importance in a week laden with risk events.
With momentum to the upside and a high bar for US inflation data to continue unwinding dovish Fed bets, you get the sense directional risks for EUR/USD are asymmetric near-term with US data weakness likely to spark a significantly larger move to the upside than what stronger data may deliver to the downside. As such, buying dips or breaks is preferred to selling rallies.
Buying EUR/USD breaks or dips preferred to selling rallies
Should EUR/USD manage to break and hold above the resistance zone located around 1.0800, it will allow for fresh longs to be established with a stop loss below 1.0780 for protection. The downtrend running from the start of the year would be the first hurdle for bulls to overcome, followed by 1.0885, the high struck on April 9. Beyond, EUR/USD struggled beyond 1.0950 either side of the calendar turn, making that an appropriate zone to reassess longs if and should the price get there.
Should EUR/USD pullback from current levels, the strong bounce from support at 1.0725 indicates the pair my find renewed buying interest from this level, potentially providing a level to establish long positions just above with a stop loss for protection below. The same upside targets mentioned above would be relevant for such a trade.
-- Written by David Scutt
Follow David on Twitter @scutty
StoneX Financial Ltd (trading as "FOREX.com") is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, FOREX.com does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date.
This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it. No opinion given in this material constitutes a recommendation by FOREX.com or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although FOREX.com is not specifically prevented from dealing before providing this material, FOREX.com does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. For further details see our full non-independent research disclaimer and quarterly summary.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.
FOREX.com is a trading name of StoneX Financial Ltd. StoneX Financial Ltd is a company incorporated in England and Wales with UK Companies House number 05616586 and with its registered office at 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is authorised and regulated by the Financial Conduct Authority in the UK, with FCA Register Number: 446717.
FOREX.com is a trademark of StoneX Financial Ltd. This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy. FOREX.com products and services are not intended for Belgium residents.
© FOREX.COM 2024