EURO FUNDAMENTAL BACKDROP
The euro began the European trading session on the backfoot after worse than expected German GDP data (see economic calendar below) and GfK consumer confidence for March. The GDP numbers showed that the German economy contracted (-0.4%) in Q4 2022 and has brought back to the table “recessionary” talks.
EUR/USD ECONOMIC CALENDAR
This week we have seen mixed data from the eurozone including strong PMI flash and economic sentiment statistics while core inflation for January proved sticker than anticipated driving hawkish bets for the upcoming European Central Bank (ECB) interest rate decisions. The probability for two consecutive 50bps rate hikes in March and May are slowly growing – see table below and could lead to upcoming support for the euro. Unfortunately for the euro, these strong fundamentals have not really translated through to the euro itself primarily due to heightening geopolitical tension around Russia/Ukraine and US/China playing into the safe haven component of the greenback.
From a USD perspective, the Fed’s preferred measure of inflation via the PCE price index will be in focus later today and is projected to come in marginally lower than the prior print. Anything in line or higher could result in some added support for the dollar which may be added to through subsequent Fed officials and Michigan consumer sentiment data.
EUR/USD DAILY CHART
Chart prepared by Warren Venketas, IG
Daily EUR/USD price action shows the recent deceleration in USD strength which is now represented by a falling wedge pattern (black). Naturally, I will be looking for an upside breakout above wedge resistance considering this is associated with a bullish turnaround which would therefore exposed the 1.0700 handle and beyond.
From a bearish standpoint, a candle close below wedge support would likely invalidate the falling wedge and expose the 1.0500 psychological support level which could coincide with an oversold Relative Strength Index (RSI). Bulls will likely defend this zone should the euro fall to this level. Fundamentally, the eurozone seems to be far more resilient than initially thought leaving more room for euro strength than USD strength particularly if geopolitics play its part.