Forex Friday – February 9, 2024

• EUR/USD outlook: Key US data eyed for next week include US CPI and retail sales
• Sluggish Eurozone economy holding back EUR, while hawkish Fed keeps USD underpinned
• EUR/USD technical outlook remains bearish

Welcome to another edition of Forex Friday. In this week’s report, we will discuss the US dollar, upcoming data releases from the US next week, and why we think the EUR/USD is heading lower.

FX markets favour USD while JPY disliked amid not-so-hawkish BoJ

The EUR/USD and FX markets in general have been rather quiet, although the yen stole the show this week as comments from the Bank of Japan’s Deputy Governor sent the currency tumbling, lifting the USD/JPY above 149.00 and en route to 150.00. Will it get there today or in the week ahead remains to be seen, but fundamentally there is no major reason to doubt it. The EUR/USD has been drifting lower and looks poised to take out the December low at 1.0723. While the US macro calendar is quiet today, we will have plenty to look forward to in the week ahead, including CPI and retail sales data. The Eurozone macro calendar is quieter, but it should be a busy week for GBP/USD traders, with plenty of market moving data from the UK also scheduled for release.

EUR/USD outlook: Key US data eyed for next week

In the week ahead, we will have plenty of potentially market-moving data to look forward to from the US, including CPI, PPI, retail sales and consumer sentiment survey.

Among these, CPI and retail sales are probably the most important macro pointers for the dollar, and thereby EUR/USD outlook, as well as gold and equity markets.

This week saw the FX markets largely remain in the favour of the dollar, with the greenback remaining supported despite the lack of any further major news. The week before, a rather strong US jobs report and a few other data pointers came in ahead of expectations, while the Fed Chair Powell and his FOMC colleagues all but ended hopes of an early rate cut. That didn’t stop the big tech rally on Wall Street, however, as the S&P 500 crossed the 5K mark for the first time ever, largely thanks to stronger company earnings reports. A hotter inflation reading could underpin the dollar even further, while a weaker print would be welcomed by gold investors and reduce the bearish EUR/USD outlook.

Once CPI is out of the way, the focus will then turn to CPI and the week’s other data highlights. The health of the US consumer has been highlighted by the recent above-forecast retail sales figures, which have beaten expectations in each of the last 6 months. In December, retail sales rose 0.6%, while core sales climbed 0.4%. The stronger retail sales numbers have been accompanied by rising consumer sentiment in the last few months. Correspondingly, the unemployment rate has stayed low, wages growth high and inflation slow to come back down. The Fed has had no reason to loosen its policy sooner than expected. If next week’s data releases including retail sales point to further resilience in US economy, then watch out for more gains for US dollar.

Sluggish Eurozone economy holding back the euro

The euro has faced difficulties in maintaining its prior efforts to rebound, hindered by consistently sluggish data from the Eurozone. This week’s Eurozone data highlights showed retail sales in the single currency bloc failing to meet projections, and German Industrial Production experiencing a notable downturn in December, underscoring the persistent hurdles confronting the Eurozone’s leading economic force. Despite these setbacks, German Factory Orders unexpectedly displayed resilience, posting a substantial rise compared to forecasts. However, this positive outcome was relatively minor in the grand scheme of things. While the ECB has also pushed back against early rate cuts, data here has been weaker than the US, which has allowed the dollar to gain ground against the euro.

Apart from German ZEW Economic Sentiment survey and Eurozone Flash GDP estimate, there’s not an awful lot on the agenda from the Euro area in the week ahead, which means the focus for EUR/USD traders will be on the US and dollar side of the equation.

EUR/USD outlook: Technical levels and factors to watch

Source: TraingView.com

For the time being, the EUR/USD has found support at its December low of 1.0723, though there remains a good possibility of it breaking below this level soon, possibly as early as today. Since Wednesday, the EUR/USD has been encountering resistance within the 1.0780 to 1.0845 range and has thus far remained below it. The lower boundary of this range corresponds to last Thursday’s low, which was breached following a robust US nonfarm payrolls report the next day. The upper boundary of the range coincides with the 200-day moving average. It wouldn’t be surprising if the EUR/USD initiates its next downward movement from here, potentially decisively breaking below the December low this time.

While there is a chance that the EUR/USD has formed a double bottom pattern, there is limited fundamental rationale for the dollar to begin a downward trend, given recent data surprises and hawkish comments from the Federal Reserve. Therefore, under current circumstances, I would only consider bullish trades on the EUR/USD if we witness a clear bullish reversal pattern emerge first, or if there’s a potential breakthrough above the most recent high, just shy of the 1.09 mark, to invalidate the prevailing bearish trend in the EUR/USD.

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R