EURUSD Breaks Below Bear Pennant, Favouring Sellers

Against the backdrop of persistent inflation, tightening central banks and ongoing uncertainty surrounding the Russia-Ukraine war, the EURUSD continues on its downtrend that started since June 2021. The US Dollar Index (DXY) which gauges the greenback’s strength against a basket of rival currencies, is currently hovering around the highest levels since May 2020, at 98.6. In this article, we will look into some key drivers that have influenced the price of EURUSD and perform technical analysis on the chart to find out where prices could be headed.  

Russo-Ukrainian war sparks demand for safe haven assets

The ongoing war in Ukraine has put markets in a risk off mood which favours safe haven assets like the US dollar and Gold. As long as the conflict continues and the fear of escalation spooks the markets, the US dollar will likely remain strong as it will be bolstered by the risk sentiments.

On the other hand, the war is also weighing on growth outlook in the European Union, hurting the Euro against the US dollar.

Dwindling economic sentiment in the EU

The worsening economic outlook in the EU is evident with the release of ZEW Survey – Economic Sentiment for March, which measures the institutional investor sentiment, reflecting the difference between the share of investors that are optimistic and the shares of analysts that are pessimistic. March data disappointed the markets with a -38.7 reading, lower than the forecasted 49.3. A negative figure in March reflected that the pessimists form the majority of this survey. A gloomy outlook on an economy normally comes with the depreciation of its currency.

Hawkish Fed

The US dollar advanced after Fed chair Jerome Powell made some hawkish remarks at the NABE annual conference. He said that the Fed would take the “necessary steps” to tame inflation towards their target of 2%, not ruling out the possibility of hiking rates by more than 25 basis points in future meetings. Jerome Powell added that “if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”.

A hawkish monetary policy is typically bullish for a nation’s currency, as a higher yield increases demand and drives up its value.

Technical Analysis

Technical set up for the EURUSD is bearish as it recently broke down from a bear pennant formation. The Relative Strength Index (RSI) failed to advance above neutrality zone at 50, validating that the momentum is currently bearish. The Moving Average Convergence Divergence (MACD) also resides in the negative region, confluent with bearishness painted by the RSI.

Looking ahead, we forecast that the pair will decline to test 1.0885 (S1), if this level is broken, the next support lies at 1.0808 at S2. In the alternate scenario where EURUSD gains positive momentum, R1 at 1.112 will be an important resistance to break before further ascent.

Tuesday, March 22

EUR – ECB’s Lane speech, Consumer Confidence(Mar)

USD – Fed’s Mester speech, Fed’s Chair Powell speech, New Home Sales (MoM)(Feb), Fed’s Daly speech

Wednesday, March 23

EUR – ECB’s Lane speech, Consumer Confidence(Mar)

USD – Fed’s Mester speech, Fed’s Chair Powell speech, New Home Sales (MoM)(Feb), Fed’s Daly speech

Thursday, March 24

EUR – Germany Markit Manufacturing PMI(Mar), Germany Markit PMI Composite(Mar), EU Markit PMI Composite(Mar), ECB’s Elderson speech

USD – Durable Goods Orders(Feb), Initial Jobless Claims (Mar 18), Nondefense Capital Goods Orders ex Aircraft(Feb), Markit Manufacturing PMI(Mar), Markit Services PMI(Mar)

Friday, March 25

EUR – EU leaders summit, Germany IFO – Business Climate, Current Assessment, Expectations (Mar)

USD – Fed’s Williams speech, Michigan Consumer Sentiment Index(Mar), Pending Home Sales (MoM)(Feb)