EUR/USD Analysis

• Sentiment data vs hard data: a tough time ahead for Europe
• EUR/USD hints at ST decline within broader LT uptrend, US CPI next
• EUR/USD responding to moves in US equities, strong correlation exhibited
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Sentiment Data vs Hard Data: A Tough Time Ahead for Europe

Yesterday’s sentiment data broadly showed improvement, in line with what had been witnessed towards the latter stages of 2023. In addition, inflation expectations and general perceptions of future price pressures edged higher. These may seem like encouraging data points but when viewed alongside deteriorating hard data, particularly manufacturing data, the threat of stagflation cannot be entirely dismissed. German, and the broader EU manufacturing PMI figures, present a sector that is contracting.

With little to no improvement in China despite stimulus efforts by the Chinese government, the external environment is shaping up to be a frosty one for Europe despite sentiment data picking up. Earlier today the European unemployment rate dropped from 6.5% to 6.4%, as the labour market maintains its resilience despite the industrial contraction.

EUR/USD Hints at ST Decline Within Broader LT Uptrend, US CPI Next

The broader EUR/USD uptrend remains constructive (series of higher highs and higher lows) but more recent price action and the formation of what appears to be a bearish flag, threatens to extend the bearish move.

Price action has moved lower after producing the recent swing high at 1.1140 in the final trading sessions of 2023 and looks to Thursday’s catalyst to provide direction. US CPI is due on Thursday and is likely to elevate EUR/USD volatility as onlookers assess whether there has been continued progress on the inflation front.

The bear flag has been held up at the zone of interest (yellow rectangle) which highlights wo Fibonacci levels: one relating to the major 2021 to 2022 decline (50% Fib) and the other, the 2023 decline (61.8% Fib). Any upside surprise in the CPI print could entertain a short-term bearish continuation. Support at 1.0831 and resistance at 1.0960 followed by 1.1017.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

The chart below conveys that EUR/USD price action has been largely driven by moves in the US equity market. With very little to separate interest rate expectations between the two currencies, general market sentiment and potential geopolitical developments could have a greater influence on future price action.

EUR/USD Reveling a Linear Relationship to Stocks (Risk on/Risk off)

Source: TradingView, prepared by Richard Snow

https://www.dailyfx.com/news/eur-usd-price-forecast-sentiment-and-hard-data-continue-diverge-20240109.html