02.01.202415:24 Forex Analysis & Reviews: EUR/USD: Can we trust the downward impulse?

So, the 2024 season has officially started: after a pre-New Year's dormancy and lengthy three-day weekend, the currency market has, so to speak, come to life. The EUR/USD pair continued its downward journey, moving by the momentum of Friday's trades.

Last Thursday, the pair updated a five-month price high, reaching the 1.1140 mark. This impulsive growth occurred against the backdrop of an almost empty economic calendar, in the conditions of a "thin" market. Secondary macroeconomic reports in the areas of labor market, foreign trade, and real estate in the U.S. came out in the "red zone," reinforcing "dovish" sentiments among traders, which was enough for an upward surge of EUR/USD.

For instance, the number of initial jobless claims increased to 218,000 against a forecast of 211,000. The indicator has been growing for the second consecutive week. It was also revealed that the negative balance of the U.S. foreign trade in goods in November widened to $90.3 billion (in October, this figure was at $89.6 billion). Goods exports decreased by 3.6% (to $164.1 billion), and imports fell by 2.1% (to $255.4 billion). Another disappointing indicator was in the real estate sector. The volume of pending home sales did not increase in November, whereas most experts had predicted a growth of 0.8% YoY.

By and large, nothing catastrophic happened (although nothing good either). But traders reacted vehemently to these releases. Perhaps too vehemently – having reached the 1.1140 mark, the market came to the realization that it was getting ahead of itself. After all, if inflation in the U.S. starts to pick up again, the hawks of the Fed will once again take the initiative, insisting, at the very least, on maintaining the status quo (or at most – on another rate hike). Therefore, EUR/USD buyers took profits and allowed sellers to organize a major correction, which we are now observing.

However, note that there are no substantial reasons for a trend reversal today, so one should approach the current price movement with skepticism.

In general, the emerging decoupling of positions between the Federal Reserve and the European Central Bank plays against the greenback. The market still prices in a 75% probability of a 25 basis point rate cut by the Fed at the end of the March meeting (according to the CME FedWatch Tool data). The likelihood of a rate cut to 5.0% at the May meeting is 70%. And by the end of the June meeting, the central bank may lower the rate to 4.75%—the probability of this scenario being realized is 67%.

At the same time, members of the European Central Bank maintain a surprisingly hawkish stance, repeating the mantra that it's too early to celebrate victory over inflation in the Eurozone. Notably, these concerns are consistent with expert forecasts for the rise in CPI in Germany and the Eurozone. According to them, the overall German consumer price index in December is expected to rise to 3.7% YoY, while the harmonized CPI could increase to 3.8% YoY (after a decline to 2.3% in the previous month). As for the pan-European indicators, a rise in the overall CPI and a further slowdown in the core index is expected.

The relevant reports will be published on Thursday and Friday. If they turn out to be in the green zone, the growth of EUR/USD will be driven not only by the weakening of the greenback but also by the strengthening of the euro. Therefore, selling the pair is now risky, also considering this fundamental factor. Moreover, on Friday, the Nonfarm Payrolls will be released, which could also worsen the fundamental picture for the greenback. Especially since preliminary forecasts do not bode well for the dollar (rise in unemployment rate, weak increase in employment numbers, decrease in wage indicators).

Therefore, speaking "in general," the picture here clearly does not favor the sellers of EUR/USD.

Talking about the "current state," most fundamental factors (like the PMIs) also favor the euro. Today, the final assessment was published. Usually, it matches the initial one, but this time, almost all indicators were revised upwards. Slightly, but still.

Additionally, data from China indirectly contribute to the pair's growth. During the Asian trading session on Tuesday, the Caixin Manufacturing PMI index was published. In December, it rose slightly to 50.8 from the previous value of 50.7. The result was slightly above the forecasted 50.4. But the important point here is that the indicator is above the key 50-point mark, indicating expansion for the second consecutive month.

Thus, despite the confident downward dynamics of EUR/USD, it's not advisable to rush into selling. Especially until the bears consolidate below the 1.0920 support level (the middle line of the Bollinger Bands indicator on the daily chart). Recall that the pair is correcting against the backdrop of an almost empty economic calendar, but starting from Wednesday, there will be many important news events that (if the forecasts are to be believed) may support the buyers of EUR/USD.