EUR/USD Supported Ahead of Key Tech Levels, After its Worst Week of 2023

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EUR/USD Analysis

The greenback benefitted last week from mostly hawkish Fed commentary, poor data and news around regional US lenders that revived fears of an economic slowdown and the lack of resolution on the US debt ceiling.

CPI Inflation in the United States moderated in April, but only marginally, keeping pressure on the Fed for continued monetary restraint and leading officials to mostly hawkish remarks. Mr Williams (voter) for example, warned that "we haven't said we are done raising rates" [1], while dismissing any expectations for cuts, according to Reuters. Mr Bullard (non-voter) on his part, noted policy is currently "at the low end of what is arguably sufficiently restrictive". [2]

Meanwhile, regional US lenders stayed in the spotlight, as troubled PacWest disclosed an approximately 9.5% drop in deposits for the week ended May 5 [3], which along with an increase in jobless claims kept fears of recession front and center.

Sentiment was also weighed by the lack of tangible progress on the US debt ceiling negotiations. Over the weekend however, US President Biden hinted at new talks on Tuesday [4], while the Congressional Budget Office said that if the government has sufficient funds until June 15, then it will be probably be able to continue financing operations "through at least the end of July" [5]. Treasury Secretary Yellen had previously estimated that funds could run out as early as June 1. [6]

On the other side of the Atlantic, ECB policymakers continued to provide aggressive commentary, that point to more tightening ahead. Speaking on Nikkei, President Lagarde reiterated that the central bank has "more ground to cover" [7], while Mr Nagel warned that "we haven't finished yet: interest rates should rise further still", in a F.A.Z. interview. [8]

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EUR/USD registered its worst week since September 2022 and closed below the EMA200 (black line), as risk aversion worked in favor of the greenback, exposing the pair to the critical technical region of 1.0820-1.0680. This includes the daily Ichimokou Cloud, the ascending trend line from the 2022 multi-year lows and the 200DaysEMA and a break lower will bring 1.0481 in the spotlight.

On the other hand, sustained weakness past the aforementioned key tech level is hard to justify under the current monetary policy differential, since the two central banks continue to drift apart, with the ECB being more hawkish.

Furthermore, the common currency finds support today as the Relative Strength Index (RSI) hit the most oversold levels since September 2022. As such, EUR/USD may find the opportunity to rebound back above the EMA200 and keep the 2023 highs in sight (1.1096). This would need a catalyst though, with immediate bias being on the downside below the EMA200.

Market participants will look to more ECB/Fed commentary this week, including Chair Powell, as well a series of key indicators, such as Eurozone CPI and US retails sales and industrial production.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 15 May 2023 https://www.reuters.com/markets/us/feds-williams-says-inflation-still-too-high-eyeing-financial-conditions-2023-05-09/

2

Retrieved 15 May 2023 https://www.stlouisfed.org/news-releases/2023/05/12/bullard-monetary-fiscal-policy-mix-and-central-bank-strategy

3

Retrieved 15 May 2023 https://www.sec.gov/ix

4

Retrieved 15 May 2023 https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/05/14/remarks-by-president-biden-in-press-gaggle-12/

5

Retrieved 15 May 2023 https://www.cbo.gov/publication/59160

6

Retrieved 15 May 2023 https://home.treasury.gov/news/press-releases/jy1454

7

Retrieved 15 May 2023 https://www.ecb.europa.eu/press/inter/date/2023/html/ecb.in230510~8696fb873b.en.html

8

Retrieved 27 May 2024 https://www.bundesbank.de/en/press/interviews/-interest-rates-should-rise-further--908844

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