Euro to US dollar analysis: EUR/USD kicks off 2024 on a downbeat note

• Euro to US dollar analysis: EUR/USD slips below 1.10 handle
• Lots of key data to come from US this week
• EUR/USD technical analysis: 1.10 now key short-term resistance to watch

Ahead of a busy first week of the year, sentiment in the first half of the first trading day of the year has been noticeably downbeat. We saw the EUR/USD drop back below the 1.10 handle, along with the other major currency pairs. Elsewhere, US index futures and government bonds fell, while European indices gave up earlier gains to turn lower by mid-day in London, with investors starting the first trading day of the year in a cautious mood after the big risk rally towards the end of 2023. But has anything changed?

Why are markets in risk-off mood?

The key denominator behind all these market moves is the drop in government bonds, lifting their yields across the board. It looks like investors have had a rethink over the holidays and realised that perhaps they had gotten a bit wild with expecting several rate cuts from the Fed, ECB and others this year. Others would point to the fact US stock market rally was overstretched and a pullback or correction was always likely to happen anyway. On top of all this, Iran has dispatched a warship to the Red Seas, apparently in retaliation after the US Navy sank Houthi boats on Sunday. Hence (or otherwise), the price of crude oil is higher.

With investors paring bets on deep interest-rate cuts from the major central banks this year, this has helped to support the dollar and weighed on index futures. Still, investors’ views can easily change again depending on the incoming data this week, of which there will be plenty.

Before we get to those, let’s have a quick look at the chart of the EUR/USD first.

Euro to US dollar analysis: EUR/USD technical analysis

Source: TradingView.com

The EURUSD failed to make a new high for 2023 in December, when it peaked at 1.1140 and was therefore more than 135 pips below the year’s high at 1.1275 that was hit in July. These levels will be the main upside objective for the EUR/USD bulls. Short-term resistance is now seen around the 1.10 handle, which has failed to hold as support for now. Another reference point to watch is this year’s opening price is at 1.1046. Given the fact that the EUR/USD ended a two-year losing run in 2023, a move above this year’s opening price would signal the resumption of the multi-month bullish trend.

There are plenty of potential support levels to watch, starting at around 1.0950 which was being testing at the time of writing. Here, we also have the 21-day exponential moving average coming into play. The longer-term 200-day simple average comes in at 1.0845.

In light of the weaker start to the year, it may be best for the bulls to wait for a bullish signal first than to blindly bid price at potential support levels, a strategy that tends to be favoured in more established and strong bullish trends.

Plenty of data to come in first week of 2024

The economic calendar is filled with plenty of key US data in the first week of January. We will have the ISM manufacturing and services PMIs, the FOMC’s December meeting minutes and the monthly nonfarm payrolls report, along with a few other data releases.

From the Eurozone, the key data release will be the German CPI on Thursday, with the Eurozone inflation figures to come a day later on Friday.

Let’s now briefly review the top 3 of those US data releases…

ISM Manufacturing PMI

Wednesday, January 3

We will have a handful of pre-NFP leading indicators in the first few days of the year, starting with the ADP private payrolls and ISM manufacturing PMI on Wednesday. The headline PMI has remained below the boom/bust level of 50.0 for more than a year now. That trend is likely to continue as we start the first week of trading in 2024, with economists predicting a small uptick in the December print to 47.2 from 46.7 in the previous month.

FOMC meeting minutes

Wednesday, January 3

The FOMC signalled 3 rate cuts in 2024 at their last meeting in December, sending some of the US stock indices to fresh record highs and causing a sharp drop in bond yields and the dollar. Since that meeting, some Fed officials have tried to scale back market pricing of several rate cuts, but this proved to be futile in December, even with US data remaining surprisingly resilient in some sectors of the economy. The minutes of the December meeting should provide more clarity about the Fed’s next move, but the market has started to trim bets on interest-rate cuts at the start of this year.

US non-farm payrolls report

Friday, January 5

It is all about when the Fed will start cutting rates in 2024, and the December jobs report could have significant implications on those expectations. Last time, the jobs report was quite strong with both the headline jobs growing more than expected at nearly 200K and average hourly earnings printing 0.4% m/m. If employment continues to remain strong, then the Fed may have to delay its rate cuts in an effort to prevent inflation from accelerating again. The market will be looking for evidence of a soft landing.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R