Market Data 
- EUR/USD extends its recovery as mixed US data weighs on the US Dollar.
- The US Dollar may also now already have “a lot priced in” according to analysts at Commerzbank.
- The short-term trend could now be bullish on the 4-hour chart.
EUR/USD sherpa-treks higher on Thursday, with a foothold now above 1.0700 as it continues its labored recovery from the 1.0601 April lows. Recent mixed US data has tarnished the image of the US economy, undermining the supremacy of the US Dollar (USD), whilst the Euro (EUR) holds firm on strong services-sector data.
EUR/USD rises as US data mixed
EUR/USD began its recovery on Tuesday after preliminary US PMI data for April showed an unexpected cooling in business activity, suggesting the economy was beginning to feel the burden of higher interest rates.
On Wednesday, the US Census Bureau revealed that Durable Goods Orders in the United States increased 2.6% MoM in March, up from a 0.7% rise previously, and beating estimates of 2.5%. Core goods, which exclude transportation, increased by 0.2% MoM, an improvement over February’s 0.1% increase, but short of the 0.3% projected.
Whilst the Durable Goods data was positive, it failed to move USD. This could be because it is viewed as a volatile series or, as some now think, because a lot is already priced into the Dollar, making it less sensitive to positive data.
“A lot is already priced into the Dollar” – Commerzbank
EUR/USD’s recovery may be due to the US Dollar having priced in a lot, in particular the acute shift in market expectations regarding the future course of interest rates, according to Analysts at Commerzbank.
Since the Federal Reserve’s (Fed) March meeting markets have consistently pushed back the date by when the Fed is likely to begin cutting interest rates – higher interest rates attract more foreign capital inflows and are thus positive for the US Dollar.
This recalibration of the future path of interest rates has now been fully priced in, according to Antje Praefcke, FX Analyst at Commerzbank, and in the absence of more catalysts, makes USD more vulnerable to “bad news” than “good news”.
“In my opinion, the market’s reaction (USD falling this week) shows that a lot is already priced into the Dollar, such as a soft landing of the economy or a Fed that will only cut the key interest rate much later than previously thought,” says Praefcke.
The US Dollar having “priced in a lot” is why it reacted more to the poor US PMI data on Tuesday than the positive US Durable Goods Order data on Wednesday.
“It is becoming increasingly difficult for the Dollar to benefit from facts and figures that underpin this expectation (a delay in future rate cuts); on the contrary, it tends to react sensitively when the market has doubts about its current expectation in the face of not-so-good data. The Dollar is gradually running out of steam, although it is currently the undisputed most popular currency and is likely to remain so,” adds the Analyst.
This view may tone the reaction of EUR/USD to first quarter GDP data on Thursday, with a miss causing more damage to USD than a beat.
EUR/USD rises due to services-sector effect
The Euro (EUR), meanwhile, stabilizes as strong Services PMI data stokes services-sector inflation expectations. This is seen potentially reigning in the European Central Bank (ECB) as it forges ahead with cutting interest rates.
Although a June rate cut is probably still a “fait accomplis”, according to Luis de Guindos, the Vice President of the ECB, his colleague at the ECB, Bundesbank President Joachim Nagel was more cautious on Wednesday.
Nagel said, “Services inflation remains high, driven by continued strong wage growth,” and until inflation fell in a sustainable manner he could not “pre-commit to a particular rate path.”
Hi views were echoed by European Central Bank (ECB) executive board member Isabel Schnabel and ECB Policymaker Madis Muller on Thrusday, with Schnabel highlighting persistent services-sector inflation and Muller saying she was not comfortable committing to “back-to-back cuts.”
Technical Analysis: EUR/USD breaks out of short-term range
EUR/USD has broken out of the rectangular range it was trading in on the 4-hour chart by piercing above the ceiling at 1.0700.
It is now less certain EUR/USD is forming a Bear Flag price pattern, which has become deformed by the breakout.
EUR/USD 4-hour Chart
There is an argument for the short-term trend now being bullish and therefore suggestive of more gains in the pair. Resistance from a previous lower high on April 11 gives an initial target at 1.0757. Then the 50-day and 200-day Simple Moving Averages (SMA) on the daily chart (not shown) are likely to resist at 1.0807.
On the other hand a break below the 1.0601 April 16 low would revive the Bear Flag hypothesis.
According to technical lore, the expected move down from a Bear Flag equals the length of the preceding “pole” or a Fibonacci ratio of the pole.
The Fibonacci 0.618 ratio of the pole extrapolated lower gives a conservative target at 1.0503. The next concrete target is at 1.0448 – the October 2023 low. A fall of equal length to the pole would take EUR/USD to 1.0403.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
