Euro to US dollar analysis: EUR/USD tests support as dollar rebounds - Technical Tuesday

• Euro to US dollar analysis: Has the dollar peaked?
• EUR/USD key levels to watch is in the 1.0635-1.0667 range

After an impressive rally last week, the EUR/USD had given back a chunk of those gains at the time of writing, like all other FX majors. The lack of any major news has allowed the dollar to simply drift higher again. Before we discuss the macro factors impacting the EUR/USD, let’s have a look at the chart first.

Euro to US dollar analysis: EUR/USD key levels to watch

Source: TradingView.com

The EUR/USD was testing a key support area at the time of writing around 1.0667, the top of the key 1.0635-1.0667 range. This level was the high from Thursday, which gave way following the weaker US data on Friday. With this level being previously resistance, we could see renewed strength come back into the EUR/USD after starting the week lower.

However, if there are no signs of the bulls in this 1.0635-1.0667 range, then the bulls will be in trouble again.

The dollar sold off last week on signs of peak interest rates in the US. We had a few data misses and comments from Fed officials to suggest that the tightening cycle is now done. Some investors have even started to look forward to interest rate cuts, and this was reflected in a sharp fall in bond yields. So far this week we haven’t seen any follow through in the selling pressure yet.

Investors are perhaps wary of the fact there are no major bullish catalysts this week, while the Fed is likely to throw caution to the wind with policymakers likely to dismiss talks of speedy interest rate cuts from the US central bank.

Euro to US dollar analysis: Has the dollar peaked?

Friday’s publication of a weaker US jobs report and ISM PMI data further cemented expectations that the Fed has reach peaked interest rates. Bond yields and the dollar sold off as the headline non-farm payrolls report was weaker compared to expectations, printing 150K and there were downward revisions to the prior month’s reading, underscoring the view that jobs growth is weakening as the impact of the Fed’s tightening works through the economy. 

Following last week’s data dump, this week is going to be quieter for US data until Friday when the UoM’s survey is released, although it remains to be seen how much of an impact this will have on the greenback. Other US data highlights this week include the weekly jobs report on Thursday and Powell’s speech on Wednesday. So, if the dollar were to move sharply this week, this will be more likely because of external factors and spill over from last week, than anything new US-related.

Investors are wondering whether the trend of US data has now decidedly turned. The resilience of the US economy and the potential for inflation to remain high for longer is what drove the dollar to new highs for much of 2023. But in recent weeks have seen some signs of weakness in data. If the weakness turns into a trend, then we may well have seen the peak of the dollar. The NFP and ISM PMI data certainly pointed in that direction last week. The trouble is, though, that it is not just the US where economic data has deteriorated. The rest of the world, most notably China and the Eurozone, have been in an even prolonged period of soft data patch. In the land of the blind, the one-eyed man is king. So, the dollar may yet rebound because of a relatively better performance in data.

Meanwhile, it is possible that the dollar may find support from a possible bearish reversal in the stock markets, say because of weak company earnings or if the situation in the Middle East deteriorates to the point other oil-producing nations get militarily involved in the conflict. So, geopolitics remain a key risk factor to watch. But so far there hasn’t been any signs of a stock market reversal.