According to recent trading, the exchange rate of the euro against the dollar (EUR/USD) rose to its highest level since June 2022, following a strong recovery driven by supportive energy markets in the euro area and a data-driven decline in the value of the US dollar. More gains are likely, according to some expectations.
Be Cautious
- The recent rebound gains for the EUR/USD currency pair reached the 1.0760 resistance level, which is stable around it at the time of writing the analysis, and the highest for the currency pair in seven months.
- All in all, the EUR/USD currency pair started 2023 in full swing, bouncing off temporary highs amid the dollar's recovery under pressure.
- However, it regained weakness and exploded to its best levels in several months on Monday as investors quickly discounted the possibility of ending the cycle.
“EUR/USD has been involved in the dollar sell-off and the bias appears to be higher,” said Chris Turner, who heads the forex analysis team at ING Bank. "The conditions here are somewhat similar to the summer of 2007 when the slowdown in the US housing market saw a growing conviction - particularly from August 2007 onwards - that the Fed would have to ease," he added.
Looking back at price action in 2007, the analyst notes that the two-year US yield slipped to 2.70% after trading in the 4.50-5.00% range for the first half of 2007, and by the end of that year, EUR/USD had rebounded by about 10%. The dollar tracked US yields higher in 2022 as global investors sought higher yields, and thus the dollar is likely to decline if this dynamic is reflected in bond markets, as is currently the case.
“Of course, there are many differences between the past and the present, for example, the subprime mortgage in the United States at the time, versus the battle of American inflation now,” the analyst added. But the surprisingly hawkish European Central Bank (then and now) is warning that EUR/USD could rally strongly if the market is convinced that the Fed will back down.
On the other hand, the European Central Bank said in December that it was ready to raise interest rates by at least 50 basis points on two other occasions, surprising the market as investors wondered if the ECB would slow down. Meanwhile, the US Federal Reserve has signaled that it will back down soon and investors are now expecting an additional 25 basis points increase, well below what is being priced at the European Central Bank.
“The US dollar started the week in full swing, as it lost ground against other major currencies and approached its lowest levels in December. Investors are starting to price in a less aggressive stance from the Federal Reserve after Friday's jobs numbers showed that," said Ricardo Evangelista, Senior Analyst at ActivTrades.
US labor market statistics on Friday revealed a slowdown in the rate of US job creation while wage numbers were disappointing. But it was the sharp contraction in US service-sector activity that finally convinced the markets that a physical slowdown was now underway and that the Fed could afford to take a break. Factors behind the euro's rally include lower gas prices amid warmer weather - which also brings stronger winds that drive wind turbines - and higher levels of gas storage.
All this mitigates the immediate risks of an energy crisis and lowers the bottom line of any recession in the eurozone.
EUR/USD Forecast Today:
There is no change in my technical view of the performance of the price of the EUR/USD currency pair, where the bull's control continues, and the performance may remain the same until the announcement of the US inflation numbers.
In general, breaking the 1.0800 psychological resistance is important for more bulls to control the direction, and at the same time, it will move the technical indicators toward overbought levels. On the other hand, according to the performance on the daily chart, the move of the EUR/USD pair towards the 1.0590 support level will be important to end the current bullish expectations. I still prefer to sell the EUR/USD from every bullish level.
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