Bears continue to dominate the EURUSD as it created a fresh 16-month low. The weakness in the pair could be attributed to a series of upbeat expectations on the US economy, paired with some discouraging developments from the European region. The US Dollar Index (DXY) that gauges the strength of the greenback against a basket of rival currencies closed above the 96 mark for the first time since July 2020 and is currently hovering around 96.5.
Jerome Powell’s reappointment as Fed chair
On Monday evening, US President Joe Biden announced that he is nominating Jerome Powell for a second term as chairman of the Federal Reserve. The announcement has spurred demand for the greenback and saw the EURUSD plummet to new low at 1.1230. Another Fed chair contender, Lael Brainard was appointed as Vice-Chairwoman, replacing current Vice-Chair Richard Clarida. Lael Brainard is viewed by analysts as more dovish on inflation compared to Jerome Powell. The re-nomination of the Fed chair provides stability and the market would expect the hawkish stance to remain. The Fed has begun tapering its monthly bond purchase by $15 billion per month while many expect the central bank to raise interest rates in 2022 to curb the high inflation.
Consumer spending remains strong in the US
For the month of October, the US Census Bureau reported that Retail sales over-performed market expectations by jumping 1.7%, up from the 0.8% growth in September. The upbeat data was a third consecutive monthly advance and it beat the market consensus of a 1.4% increase. Retail sales figure is a leading indicator that tells important information about consumer spending. Despite the high inflation figures, the report suggested that spending has yet to dampen. This is generally a bullish signal that has helped the US dollar advance.
Covid woes in the EU
As the US Dollar strengthens, the resurgence of Covid-19 cases in Europe has helped send the pair lower. On Monday, Austria has entered into a nationwide lockdown in response to the largest Covid-19 wave the country has seen. In this drastic restriction, Austria’s 8.9 million people will not be allowed to leave home except for work, shop for essentials and exercise. In addition, tighter curbs are also set to be imposed in Germany as its Covid-19 situation has worsened, unlike anything the country has seen so far, said German Chancellor Angela Merkel on Monday. Fear of further lockdowns in cities across Europe has dampened the economic recovery outlook for the region, favouring the bears of the EURUSD.
Dovish ECB
Against the backdrop of a tapering in the US, European Central Bank President Christine Lagarde reiterated her dovish stance, warning that the ECB “must not rush into a premature tightening” of monetary policy. Speaking at the Frankfurt European Banking Congress last Friday, she also mentioned that “conditions to raise rates are very unlikely to be satisfied next year”. A combination of Covid woes in Europe and a dovish ECB pushed the Euro weaker against the strengthening greenback.
Technical analysis
The EURUSD is set to achieve price target of a 12-month long head and shoulders pattern which completed in July. After threading above the 200-day simple moving average in October, the pair failed to sustain the support and has dropped below the trend line. The Relative Strength Index (RSI) crossed below the oversold mark at 30 and may cause sellers to remain sidelined. Moving Average Convergence Divergence (MACD) on the other hand is negative and shows that bearish momentum in full swing. Looking ahead, we do foresee a test of the 1.12 psychological level, which coincides with our head and shoulders pattern target. If the price manages to fall beneath 1.12, the 23.6% Fibonacci level at 1.1039 is the next support level. In the event of a rebound, 38.2% and 50% Fibonacci levels (1.1281, 1.1482 respectively) would serve as resistance levels.
Key events to watch in the coming week:
Tuesday, November 23
EUR – German Markit Manufacturing PMI (Nov), German Markit PMI Composite (Nov), EU Markit PMI Composite (Nov)
USD – Markit Services PMI (Nov), Markit PMI Composite (Nov)
Wednesday, November 24
USD – President Biden speech, Durable Goods Orders (Oct), Nondefense Capital Goods Orders ex Aircraft (Oct), Gross Domestic Product Annualized (Q3), Core Personal Consumption Expenditures – Price Index (MoM)(Oct), Michigan Consumer Sentiment Index (Nov), Personal Income (MoM)(Nov), New Home Sales (MoM)(Oct), Core Personal Consumption Expenditures – Price Index (YoY)(Oct)
EUR – ECB’s De Guindos speech, German IFO – Business Climate (Nov), ECB’s Panetta speech
Thursday, November 25
EUR – ECB’s Schnabel speech, German Gfk Consumer Confidence Survey (Dec), ECB’s Elderson speech, ECB Monetary Policy Meeting Accounts, ECB’s President Lagarde speech
USD – FOMC Minutes
Friday, November 26
EUR – ECB’s President Lagarde speech, ECB’s Schnabel speech, ECB’s Panetta speech
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