Why would anyone buy shared currency?

  • Central banks have revived fears of stagflation and warned of continued high inflation.
  • The United States and Germany will release new consumer price index figures next week.
  • The EUR/USD corrective advance is not enough to convince buyers.

A fairly volatile week ended with EUR/USD trading around 1.0560, not far from the year-to-date low of 1.0470. The pair has corrected some of its previous weekly losses but overall retains the bearish stance.

Blame the central banks

Central banks have taken center stage this week as overheated inflation continues to spiral out of control and monetary tightening has become the new norm. The Reserve Bank of Australia was the first to raise its key rate by 25 basis points. “The economy proved resilient and inflation rose faster and higher than expected,” the statement said.

Wednesday was the turn of the US Federal Reserve, probably the most anticipated event of the week. As widely expected, the central bank raised the Fed Funds rate by 50 basis points to a range of 0.75% to 1% and announced that the bank would start reducing the balance sheet on June 1. Policymakers said they would start with a cap of $47.5 billion on monthly runoff, rising to $95 billion after three months.

Financial markets reacted little to the announcement, which was roughly in line with expectations. However, all hell broke loose with President Jerome Powell’s press conference. Among other things, Powell dismissed potential 75 basis point hikes, and investors applauded the “less aggressive” stance. Wall Street rallied, lagging alongside high-yielding currencies at the expense of the greenback. EUR/USD hit a weekly high of 1.0641 following the news, then fell to a weekly low of 1.0492 early Thursday.

The catalyst for the dollar rally was the Bank of England. The BOE’s monetary policy committee unanimously agreed to raise rates by 25 basis points to 1%. However, the central bank has lowered its growth estimates for this year and next. Additionally, Governor Andrew Bailey warned that the UK was at risk of sliding into recession before the end of the year, adding that inflation could exceed 10% in the coming months.

Back to reality for market players

Bailey’s reality check has spread to American shores as the US economy faces stagflation, that is, slowing economic growth coupled with rising inflation. Wall Street fell on Thursday and the greenback regained its footing.

Also, market participants realized that the Fed may not have been more aggressive than expected, but it is the one that applies the toughest measures. European Central Bank officials mentioned July as the possible date when they would discuss a rate hike, but by then the Fed would likely have pulled the trigger again another 50 basis points. In the long term, the imbalance of central banks will continue to favor the American currency.

Another huge factor weighing on the common currency is the crisis in Eastern Europe. Russia does not back down from its determination to dominate Ukraine and continues to attack the country. The European Union is struggling to replace Russian energy, and despite the announcement of the sixth sanctions package, it is still unable to agree on a full oil embargo. The European Commission has proposed an exemption from the oil ban for Hungary and Slovakia until 2024. The euro is unlikely to rally to its US rival as long as this threat persists.

What does the data say?

Economic growth is still on track but is slowing down. The US ISM manufacturing PMI came in at 55.4 in April, down from 57.1 in March. Services indices came in at 54.6, also missing expectations and lower than their previous reading.

On Friday, the country released April’s nonfarm payrolls report, showing that 428,000 new jobs were added during the month. The unemployment rate was 3.6%, slightly above the estimate of 3.5%. Additionally, average hourly earnings were confirmed at 5.5% year-over-year, adding to inflationary pressures and posing a major headache for policymakers.

On the other side of the pond, things are no better. German and European retail sales fell in March, missing market expectations, while S&P Global Services PMIs suffered downward revisions. Additionally, German factory orders fell 3.1% year-on-year in March.

The week ahead will be calmer in terms of top level events, with the main focus on inflation. Germany is expected to confirm April’s consumer price index at 7.8% year-on-year, while the United States is expected to report that the annual CPI for the same month fell to 8.4%. Core CPI is expected at 6.0%, down from the previous 6.5%.

EUR/USD Technical Outlook

The EUR/USD weekly chart shows that the downtrend is alive and well, with the latest advance seen as corrective. The pair is currently trading over 500 pips below a firmly bearish 20 SMA, which continues to head south below the higher longs. Technical indicators, meanwhile, have barely reduced their slides, holding in oversold readings.

The daily chart indicates that the pair has entered a corrective phase after falling to a multi-year low of 1.0470, as it has spent the past few days hovering within a range of around 150 pips. Technical indicators have corrected the extreme oversold conditions and continue to advance, albeit without strength and at negative levels, hinting at the lack of buying interest. The 20 SMA has accelerated its decline, now acting as dynamic resistance around 1.0710, while the longer moving averages maintain their downside slopes well above the shorter one.

The weekly high at 1.0641 is the immediate resistance level followed by the 1.0700 figure. A longer lasting corrective advance could take place if the pair stabilizes above the latter, targeting an approach to the 1.0800 price zone. The main level of support is the aforementioned 1-year low, with a break below exposing 1.0339, the multi-year low recorded in January 2017.

EUR/USD Sentiment Survey

According to FXStreet Forecast Survey, the EUR/USD pair is likely to continue falling next week with 78% of the experts surveyed being bearish with the pair averaging at 1.0510. Sentiment turns bullish in the monthly and quarterly outlook, seen averaging at 1.0683 in the former with 52% bullish among experts. The number of bears narrows to 19% in the quarterly view, and the pair is likely to rally towards the 1.0700 region.

The bigger picture indicates that the bears are still in full control. The weekly moving average is heading firmly down with most targets around or below the current level. The monthly moving average also exhibits bearish strength, while the quarterly average maintains its downward slope. However, from a broader perspective, most targets are stacking up in the 1.08/1.10 region, suggesting that market players are looking at least for a corrective lead.

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