Trade Of The Week: Will Data Heavy Week Trigger EURUSD Breakout?

Over the past two weeks, the EURUSD found itself trapped within a 150-pip range after bulls failed to conquer weekly resistance at 1.09.

It is worth keeping in mind that the euro remains supported by ECB hike expectations and improving sentiment towards the Eurozone economy after GDP unexpectedly grew in the final quarter of 2022. On the other hand, despite the dollar’s recent boost – the bigger picture has not changed with the Fed closer to a peak in rates in the coming few months. Essentially, the narrowing monetary policy divergence between the ECB & Fed suggests that the EURUSD is fundamentally bullish.

Regarding the technical picture, prices remain in an uptrend trend on the weekly charts. However, a technical pullback could be in play before bulls snatch back control.

The low down….

The EURUSD’s tumble over the past few weeks has been a dollar-strength theme, rather than a change in sentiment towards the euro.

Freakishly strong US economic data since the start of the month (NFP) coupled with a hot US CPI forced investors to re-evaluate Fed rate hike expectations. Markets expect the Fed to raise interest rates by 25bp in March with the Fed funds expected to peak around 5.3% by Summer. Given how the central bank is expected to pause and eventually start cutting rates in the longer term, dollar bulls may be rallying on weak foundations with bears lingering in the vicinity.

It is a different story for the ECB with markets pricing in a 50bp hike in March and a 35% probability of another 50bp move in April. However, with Eurozone inflation dropping for a third consecutive month, this has certainly impacted ECB hawks. Expect the euro to remain highly sensitive to economic data and ECB hike expectations over the next few months, especially if inflation continues to cool.

Big week for EURUSD?

The next few days could be eventful for the EUR and USD thanks to key economic data.

On Monday, investors will direct their attention toward the Eurozone consumer confidence figures for February which could influence appetite for the euro. Back in January, confidence slightly improved amid hopes of lower energy prices and government support preventing a recession. Should the figures for February, this could offer a slight boost to euro bulls.

It’s all about the Eurozone February ZEW survey and PMIs from not only Europe but the United States on Tuesday. The ZEW Indicator for the Euro Area rebounded by 40.3 points to 16.7 in January while the PMIs illustrated an encouraging picture in the same month. A similar theme for February will be warmly received by euro and dollar bulls.

Wednesday may be a big day for the USD due to the FOMC meeting minutes. Investors are expected to thoroughly comb through the minutes for more clues about the Feds rate hike path. Much focus will be on how hawkish the central bank was and whether a 50bp rate hike could have been a possibility. The overall tone of the minutes and any fresh insight into the path of future rates will most likely influence the dollar.

We have more economic data from both the Eurozone area and the United States on Thursday with the day kicking off with final January CPI figures from Europe. Annual inflation in the Euro area is forecast to fall to an eight-month low of 8.5% in January 2023 from the 9.2% witnessed last December. In the US, the weekly jobless claims, the second estimate of Q4 US GDP, and a speech from a Fed official will be in focus.

Investors are offered an appetiser on Friday in the form of the final German GDP figures and consumer confidence for March. But the main course will be the US January PCE Core deflator which is the Fed’s preferred measure of inflation. Any further signs of cooling inflation will most likely rekindle expectations around a less aggressive increase in rates by the Fed.

EURUSD: Keep an eye on the range

After failing to secure a weekly close below the 1.0650 support last week, the EURUSD remains trapped within a 150-pip range with resistance back at 1.0800.

The currency pair seems to be waiting for a potent fundamental catalyst and this could come in the form of key economic data this week. In the meantime, the EURUSD remains shaky on the daily charts with prices just below the 50-day SMA. A solid daily close below 1.0650 could signal a selloff towards 1.0500. Alternatively, should 1.0650 prove to be reliable support, prices may rebound back toward the 1.0800 resistance.