EURUSD Bounces Back to the Highs of Almost 1.0550 After a Dive from New Yearly Lows
EUR/USD erased substantial losses after a run of five consecutive negatives, bouncing to the areas around 1.0540 during Asian trading on Friday. This followed the US Dollar Index (DXY) taking its first retreats from the newest yearly high reached at 107.06. Both dovish comments by Federal Reserve Chairman Jerome Powell and mixed US economics data influenced the move. Despite the strength in Euro, the European Central Bank still remains cautious on the economic outlook, leaving its future movements toward the pair subject to developments both in the US and the Eurozone.
EUR/USD’s Recent Rebound and the Pullback in the US Dollar
The currency pair EUR/USD recovered some of the losses because of a correction within the US Dollar. As the US Dollar Index (DXY) had skyrocketed to 107.06 for the year, the reversal in this upward trend for the greenback, as well as its corresponding reversal for the Euro itself, contributed to a modest rebound for the Euro, and EUR/USD advanced toward 1.0540.
US Dollar Pulls Back
Some of the factors behind the U.S. Dollar’s pullback have been the slowdown of so-called “Trump trades,” that had been helping the dollar out in the first half of the year. These trades-tied very closely to expectations surrounding economic policies from the previous U.S. administration-have started to lose some of their momentum as market sentiment shifts.
Simultaneously, comments from Fed Chair Jerome Powell regarding the US economy lighten the tone of the US Dollar. Powell described the US economic performance as “remarkably good, thus giving Federal Reserve some leniency to slowly trim its interest rates. Contrastively, such rhetoric is diametrically opposed to the more hawkish tone that had prevailed in communications until now by the Fed, thus questioning a change in policy that should continue to weaken the Dollar at least in the short term.
Mixed US Economic Data
Powell’s comments came simultaneously with the release of US PPI numbers. The PPI index increased 2.4% year-over-year in October, beating the revised 1.9% of September and more than the market’s expectations of 2.3%. Meanwhile, the Core PPI for the month rose 3.1% YoY from 3.0% expectation, which eliminates food and energy prices. Although the data showed inflationary pressures were on the rise, which would play into the hands of the USD in the long run, the immediate reaction was tame because attention shifted to Powell’s more dovish talk over interest rates.
The convergence of these factors saw DXY pull back, falling to around 106.80 at time of writing, providing some respite to the Euro and pushing EUR/USD higher from recent lows.
EUR/USD Daily Chart
Source: TradingView, by Richard Miles
ECB in a Catch 22 Situation: How to Cut Rates while Tackling Inflation
Though the Euro has gained a few percent against the US Dollar, European Central Bank ECB is now caught between the politics of rate cuts, and home-grown inflationary concerns. Home-grown inflationary pressures-the central issue for ECB officials-arise from the boost in wages.
ECB is emphasizing more on cutting of interest rates.
Showing an increased receptivity to cut rates, the central bank at the monetary policy meeting in October signaled that it was indeed turning its ears to the calls of the reducing economy. This news marks a change in tone especially since the growth fell way slower than expected, and equally, inflation data in the Eurozone remains weak. For Isabel Schnabel, an ECB board member, interest rates remain the prime instrument for policy changes but the secondary adding instruments are buys on bonds and forward guidance.
While the ECB is paying increasing attention to cuts in rates, it has been quite cautious in taking concrete steps for some time now because the inflationary pressures continue unabated in the Eurozone. With hard-striving increases in wages coupled with the growth in labor productivity lagging behind, the raised fears of a wage-price spiral – where the increase in wages leads to higher prices that trigger even more wage increase in a spiral ride – belie this potential outcome working adversely for the ECB’s desired goal of putting inflation back on track.
ECB Cautious on Inflationary Pressures
The ECB is more sensitive to the realization that an early policy response, in this case, even some rate cuts, will mean high inflationary pressures. The central bank has thus indicated a need for more data before doing significant policy changes. The situation remains fluid, and the ECB is likely to continue monitoring the economic and inflationary landscape very carefully before making its next move.
Meanwhile, the Eurozone is likely to continue struggling to find elusive momentum in growth. Most analysts think it will slow down in 2025. Cut in rates by the ECB would weaken the Euro further though the timing and full quantum of cut are still unclear.
Key Economic Data to Watch
The movements of the EUR/USD pair are likely to be sensitive to these upcoming data releases, especially from both the US and the Eurozone. Here are some of the key economic events and indicators to monitor in the coming days:
US Economic Data
US Retail Sales (October): Details about US retail sales may help explain the soundness of the US consumer-the very pulse of the whole economy. Better-than-expected retail sales can also be an additional strength for the US dollar if it translates to continued demand despite higher inflation.
US CPI (Consumer Price Index): The main ‘event’ in the Dollar’s line-up will be the release of the US CPI report. In case inflation remains at these levels or even increases further, then this might lead to ideas about the Fed rate policy turnaround and hence a boost for the USD.
Eurozone Economic Data
Eurozone GDP Growth (Q3): The GDP data for the Eurozone will say much about its general health. Weaker growth than expected would only raise more concerns regarding the Euro outlook, while stronger growth could support the Euro in the short term.
Eurozone CPI (Oct): Eurozone inflation data remains one of the most important determinants of the ECBs policy decisions. If inflation truly does prove sticky, the ECB will likely avoid cutting rates which would be positive for the Euro
ECB and Fed Policy Meetings
ECB Meeting (November): The next ECB policy setting will be watched closely for changes to the trend of the interest rate. Traders will watch keenly for any signs that the ECB may be dovish, especially if inflationary pressures abate.
Fed Meeting (November): The FOMC meeting next month would be a crucial determinant of the US monetary policy stance moving forward. A hint at a dovish Fed at this juncture would place immense downside pressure on the USD. That might offer a tailwind to EUR/USD.
Technical Outlook for EUR/USD
The EUR/USD currency pair has started to begin recovering lately. However, the technical levels are now going to decide the course for the pair.
Resistance: Key levels are: Support: End
Resistance @ 1.0600: The first key resistance for EUR/USD is the area around 1.0600 that has acted as a psychological resistance level lately. A break above it could continue the rally of the Euro into 1.0700.
Support at 1.0500: On the other hand, 1.0500 continues to be a critical support for EUR/USD. If the pair is not able to sustain its rally and moves below this point, then 1.0450 presents significant support that tests the yearly lows.
RSI Analysis
This measure of the 14-day RSI of EUR/USD currently comes in at just about the middle of the neutral range at 50. A close above here would confirm the continuation of the uptrend, while a move below it could indicate a change back into the downtrend.
EUR/USD’s outlook continues to be tied to US and Eurozone data.
European Yuan/US Dollar broke its losing streak with help of a pullback in the US Dollar and dovish remarks from Fed Chairman Jerome Powell. However, with the outlook still uncertain regarding the Euro, given the inflationary pressures that the ECB will face, and potential cuts in rates, EUR/USD may require more convincing arguments in the following days. The near-term EUR/USD path is going to be crucially dependent on the incoming economic reports in the US and the Eurozone, as well as cues from the central banks on future policy actions.
In that regard, an eye should be kept sharp because the technical and fundamental landscape for EUR/USD is dynamic. It is supported, indeed, by key support and resistance levels.
FAQ
What propels the final bounce in EUR/USD?
Why is the European Central Bank (ECB) cautious despite the Euro’s recent strength?
What is the cause for the weakness of the US Dollar?
–Fade in “Trump trades”: Euphoria from the market regarding policies associated with the previous US administration is fading.
-Dovish comments from Jerome Powell: The Federal Reserve may attempt to eased its aggressive rate hikes, weakening the Dollar in the short term. He referred to the US economy as “remarkably good.”.
-Mixed US economic data: As inflationary pressures continue to rise, the dovish Powell tones were perhaps overshadowing the initial release of inflation data. It is therefore a partial contributor to a softer Dollar.
Which key economic data should traders watch for EUR/USD in the coming weeks?
– US Retail Sales (October) : This should give some light into the shape of the US consumer and may drive expectations for the US economy and the US Dollar.
– US CPI (Consumer Price Index): A big report on inflation expectations. Should inflation be well-sustained at such high levels, it would force the Fed to prolong its tightening policy, which would boost the USD.
– Eurozone GDP Growth (Q3): This would project the overall health of the economy in the Eurozone and thus can further put pressure on the Euro with a poor growth rate.
– Eurozone CPI (October): This would be real-time data for the inflation in the Eurozone on which the future course of action by the ECB regarding interest rates will be taken.
– ECB and Fed Policy Meetings (November): These meetings will give clear monetary policy guidance to be followed by the two central banks, hence affecting EUR/USD significantly.
What are the most important technical levels for EUR/USD to be aware of?
– Resistance at 1.0600: This level is very significant for the pair and above it must be broken to move further upwards. A breakout above 1.0600 can rally the pair up to 1.0700.
– Support at 1.0500: This remains a significant support for the pair. A break of the EUR/USD below 1.0500 will carry the threat of testing the lower end, and 1.0450 is the first level to watch for.
– RSI Analysis: The 14-day EUR/USD RSI is roughly around 50. Therefore, if it moves above this level, it would probably indicate the uptrend will continue, but a fall below 50 may draw the system back in the downtrend.
