EUR/USD Vulnerable as ECB and Fed Signal Divergence

EUR/USD faces vulnerability amid ECB and Fed divergence signals. Explore crucial levels, technical analysis, and sentiment insights shaping the Euro’s outlook.

In-depth Analysis

The Euro kicks off the week on a relatively flat note, bracing for a pivotal week of significant data releases that could shape the future trajectory of the EUR/USD currency pair. Weak economic indicators from the eurozone have exposed the Euro to whether elevated US inflation will trigger a selloff in the EUR.

Euro Fundamental Background

The week brings central bank decisions, complemented by supplementary data that could influence the stance of the European Central Bank (ECB) and the Federal Reserve. Eurozone data has led to a dovish repricing of ECB interest rate expectations. At the same time, the Federal Reserve appears less inclined to hasty rate cuts, given the resilience of the US economy. Last week’s robust Non-Farm Payrolls (NFP) report underscored the strength of the US labor market, contributing to a more optimistic outlook. Money markets anticipate the first ECB rate cut around March/April next year. At the same time, Goldman Sachs projects the Fed’s first rate cut in Q3 2024, a shift from their previous forecast of Q4 2024. The economic divergence between the euro area and the US may weigh negatively on the EUR in the coming weeks.

Euro Vulnerable as ECB and Fed Signal Divergence

Upcoming Economic Calendar

The economic calendar for the day offers minimal market-moving information. With EUR/USD expected to maintain its current levels. Attention shifts to the week ahead, which focuses on key US Consumer Price Index (CPI) and Producer Price Index (PPI) releases, providing insights into the narrative Fed Chair Powell might adopt. The US benefits from a ‘wait and see’ approach, while the ECB may face more pressure to consider monetary policy adjustments. Other vital data points include ZEW economic sentiment for Germany and the euro area: US retail sales and German manufacturing PMIs.

Technical Analysis

EUR/USD remains below the psychological handle of 1.0800. It indicates a potential move toward longer-term trendline support and the 50-day moving average. Short-term directional bias hinges on the outcomes of US CPI and PPI data. Traders exercise caution, which is evident in the Relative Strength Index (RSI) hovering around its midpoint.

Key Levels Resistance

• 1.1000
• 1.0900
• 200-day MA
• 1.0800

Support Key Levels

• 1.0700/50-day MA/Trendline support
• 1.0635
• 1.0600

IG Client Sentiment Data

IG Client Sentiment (IGCS) reveals a mixed stance among retail traders, with 58% holding long positions. Moreover, Daily data shows a 7% increase in long positions, a 12% rise in shorts, and a 9% change in open interest. Weekly data indicates a 16% increase in longs, a 17% decrease in shorts, and a 1% change in open interest.

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