Trade Of The Week: What’s Next For The EURUSD?

Fasten your seatbelts, because the next few days could be wild for the world’s most traded FX pair.

Prices have already kicked off the new trading week in a volatile fashion, gapping higher thanks to potent fundamental forces.

We witnessed EURUSD bulls dominate the scene last Friday following the mixed US jobs report which tempered expectations around more aggressive policy tightening by the Federal Reserve (Fed). NFP revealed that 311k new jobs were created in February, substantially below the previous month’s downwardly revised figure of 504k. To rub salt into the wound, the jobless rate unexpectedly rose to 3.6% whiles wages missed expectations by rising 0.2% for the month. With the dollar bashed by investors, the currency pair staged a sharp rebound – gaining 0.6% for the day.

Zooming out, it has certainly been a choppy affair with prices trapped within a messy range on the weekly charts. Major resistance can be found around 1.0900 and support at 1.0500. Fundamentally, the pendulum swings in favour of bulls due to the narrowing divergence between the European Central Bank and the Fed. However, these dynamics could be rattled in the week ahead thanks to key economic reports and major risk events.

Regarding the technical picture, prices are back within a range on the weekly charts. Bull and bears are likely to remain entangled in a tough tug of war until a fundamental spark shifts the balance.

The low down…

The euro has appreciated most G10 currencies since the start of 2023.

Euro bulls continue to draw strength from rate hike bets with markets expecting a 50bp rate hike in March and a 70% probability of another move in April. This comes in contrast to the rapidly shifting expectations around what the Fed will do in March and beyond. Earlier last week, a hawkish Jerome Powell boosted dollar bulls and speculation intensified over the Fed holding rates higher for longer. However, these bets were tempered by last Friday’s mixed jobs report.

It does not end here. The recent collapse of Silicon Valley Bank (SVB) dealt another heavy blow to Fed hike expectations. Given how the US central bank may be forced to shift into lower gear on rates to limit the contagion from the SVB fallout, this is bad news for dollar bulls.

The week ahead…

It is safe to say that the pending US inflation report and ECB meeting could set the tone for the EURUSD ahead of the Fed decision next week.

Tuesday see’s the latest US CPI figures which are expected to show price pressures easing to 6% last month compared to the 6.4% witnessed in January. Inflation is expected to cool thanks to falling energy prices but all eyes will be on the core inflation rate which could rock markets. If inflation figures print higher than expected, this could throw the dollar a lifeline – limiting downside losses. However, a figure that meets or prints below the 6% level may boost speculation around the Fed adopting a less aggressive stance.

It’s all about the European Central Bank meeting on Thursday which is widely expected to conclude with a 50-basis point rate hike, especially after the record-high Eurozone core CPI figures in February. Much focus will be on the messaging on the size of rate increases beyond the March meeting. It will be wise to keep a close eye on the updated ECB staff projections which may offer fresh insight into inflation expectations for 2024 and 2025. On top of this, the new growth estimates could also provide insight into how the central bank sees the economy faring this year. Ultimately, if the ECB strikes a hawkish stance this will support euro bulls, while a dovish stance may promote fresh euro weakness.

Looking beyond the US CPI and ECB meeting, there are other data points and market developments that could add some more spice and flavour to the EURUSD this week. On Wednesday, Eurozone January Industrial production figures and US retail sales for February will be published. Thursday, see the US weekly jobless claims and on Friday, US February industrial production coupled with consumer sentiment for March will be revealed.

EURUSD: Noisy and choppy as ever

There is much activity on the EURUSD with prices oscillating within a very wide range. There are two layers of resistance on the daily chart at 1.0750 and 1.0800 and support around 1.0500. A breakout could be on the horizon but such may require a major fundamental catalyst. In the meantime, A breakout above 1.0750 could suggest an incline towards 1.0800 and 1.0900. Alternatively, if prices sink back below 1.0650, euro bears could target 1.0500.