EUR/USD outlook: Currency Pair of the Week – January 22, 2024

• EUR/USD outlook: US dollar extends positive start to 2024
• ECB and two other central banks plus global PMIs, US GDP and core PCE all to come
• EUR/USD technical analysis and key levels to watch

The EUR/USD was a touch lower in the first half of Monday’s session, with many traders sitting on their hands ahead of the big macro events later in the week. With US GDP and Core PCE on tap from the US, and a rate decision to come from the European Central Bank, the EUR/USD is clearly going to be a bit more volatile this week, making it out currency pair of the week.

US dollar extends positive start to 2024

Last week saw the release of mostly better-than-expected US data, which helped to reduce expectations for a March rate cut. As a result, the dollar closed the week higher against the euro (and a basket of foreign currencies), albeit off its best levels.

Among other US data releases, retail sales beat, while further evidence pointing to the resilience of the labour market was released with jobless claims falling to their lowest level in more than a year. Forward-looking data was mixed, with UoM’s consumer confidence survey rising sharply to 78.8 from 69.7 as inflation expectations eased to 2.9% from 3.1% previously.

Meanwhile, we heard more hawkish talk from Fed officials. In fact, event the centrist Raphael Bostic was a bite more hawkish than expected, mirroring several other of his FOMC colleagues who have spoken lately.

EUR/USD outlook: Looking ahead to the rest of the week

After a quiet start on Monday, things should pick up as we head deeper into the week. There will be three central bank policy decisions to comes, namely the BOJ, BOC and ECB. On top of this, we will have market-moving data including global PMIs, US GDP and core PCE Price Index.

Here’s the calendar relevant to the EUR/USD exchange rate:

Now, let’s discuss the top three relevant data concerning the EUR/USD exchange rate.

European and US PMIs

Wednesday, January 24

Worries about the health of the Chinese and European economies have restrained commodities and indices heavily dependent on them, such as the UK 100, China A50, and Hong Kong 50. In contrast, indices with a focus on technology, like the US Tech 100 and Germany 40, have performed better due to expectations that the global economic slowdown will prompt a significant decrease in interest rates. The latest outlook from surveyed purchasing managers in the manufacturing and services sectors will tell us a lot more about how things have evolved at the turn of the year. These Purchasing Managers' Indices (PMIs) are regarded as leading economic indicators and are deemed more influential by investors. The EUR/USD traders will pay close attention to the European PMIs, which have been quite poor for quite a long time now. A positive response in risk assets would likely be advantageous for the euro, in the early part of Wednesday’s session. In the afternoon, when the US data is released, the reaction of the dollar and therefore the EUR/USD will then depend pretty much on the direction of the surprise.

ECB policy decision

Thursday, January 25

Ahead of the ECB’s blackout period, we heard from multiple officials who attempted to resist the idea of early rate cuts, mirroring Fed speakers. In the US, the resistance is primarily due to comparatively robust economy, while in other regions, particularly the UK and Eurozone, central bank officials are grappling with fears regarding persistent inflation and sustained wage pressures. ECB President Christine Lagarde hinted that the reduction in borrowing costs might occur in the summer rather than the spring, aligning with other ECB officials expressing worries about wage inflation. We await cues from the ECB at this meeting to discern their stance. The more cautious and resistant to rate cuts the ECB appears, the more likely the EUR is to receive support.

US Advance GDP and Core PCE

Thursday, 25th and Friday 26th

Following the release of mostly stronger-than-expected data in the last couple of weeks, the dollar has been pushing higher, keeping the EUR/USD under pressure. There has been renewed concerns over the Fed’s inclination to maintain higher interest rates longer, after Fed governor Christopher Waller suggested a measured approach. If GDP reveals further strength in the US economy, expectations of an imminent reduction in interest rates will be pushed further out. The EUR/USD bulls will be looking for weakness in US data, including GDP on Thursday and Core PCE the following day. US GDP is seen growing at an annualised pace of 2.0% in Q4, down from 4.9% in Q3. Core PCE price index is expected to have risen by 0.2% m/m vs. 0.1% the month before.

EUR/USD outlook: Technical levels to watch

Source: TradingView.com

As the ECB resists cutting rates sooner, the euro has demonstrated stronger performance compared to currencies like the Swiss franc, whose central bank appears increasingly dovish. However, to achieve gains against the US dollar, the euro needs rapid and adverse shifts in US data. Only then can it regain momentum and breach the 1.10 barrier convincingly. Currently, those bullish on the euro must focus on protecting the 200-day moving average, a task successfully accomplished in recent sessions, but the lack of upside follow-through is concerning from a bullish point of view. A potential break below 1.0845 could pave the way for a drop to 1.0815 and then the December’s low at 1.0723.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R