- An outstanding earnings report from the tech sector kept Euro afloat.
- United States’ data indicated continued growth and a still-tight labor market.
- EUR/USD closed the week with gains, but bulls are still doubtful.
The EUR/USD pair ended its losing streak and posted modest weekly gains to settle in the 1.0830 price zone on Friday, as investors continued to drop the Greenback. On the one hand, Euro gains were modest, as local data indicated persistent economic contraction, only backed by an upbeat market mood. On the other hand, the US Dollar was hit by cooling expectations of a change in the Federal Reserve’s (Fed) wait-and-see stance.
Data confirmed trouble in Europe
The economic downturn in the Eurozone continued in February, according to the Hamburg Commercial Bank (HCOB) Producer Manager Indexes (PMIs). The February surveys showed a deceleration in the rate of contraction thanks to a relatively stable services sector offsetting the sharp decline in manufacturing activity. The HCOB Flash Eurozone Composite PMI rose modestly from 47.9 in January to 48.9 in February, as the manufacturing index contracted to 46.1 from the previous 46.6, while the Services PMI surged to 50 after printing at 48.4 in January.
The situation seems even worse in Germany, as the downturn intensified in February. The HCOB Flash PMI fell to 46.1 from 47.0 in January. The manufacturing sector, in particular, experienced a sharp and accelerated reduction in output, with the index plummeting from 45.5 to 42.3. The contraction in the service sector was milder, as the Services PMI improved to 48.2 from 47.7. Finally, the country confirmed the Q4 Gross Domestic Product at -0.3% QoQ, as previously estimated.
Furthermore, the European Central Bank (ECB) monthly Consumer Expectation Survey showed consumers expect inflation to remain high for the next 12 months, with expectations rising to 3.3% in January from 3.2% in the previous month.
The data confirmed what speculative interest already knew and had no relevant impact on the Euro.
United States resilience
The United States (US) Federal Open Market Committee (FOMC) released the Minutes of its latest meeting, and the document showed policymakers that, while rate hikes are off the table, they won’t move in the opposite direction until they gain “greater confidence” that inflation is receding. Other than that, Fed officials were generally optimistic about succeeding in their battle against price pressures, as despite elevated inflation, it was moving towards the central bank’s 2% goal. However, it is worth noting that the meeting took place before the release of a hotter-than-anticipated January Consumer Price Index (CPI). The figures undermined investors’ confidence and pushed rate-cut bets towards June.
S&P Global released the flash estimate of the US PMIs, which showed manufacturing activity expanded at the fastest pace since September 2022, with the index jumping to 51.5 from 50.7 in January. The services index printed at 51.3, shrinking from 52.5 previously and missing expectations of 52, while the Composite PMI was confirmed at 51.4, slightly below the 52 posted in January.
Also, Initial Jobless Claims fell to 201,000 in the week ended February 16, its lowest in over a month, signaling that the labor market remains strong. Bottom line, US data was far more encouraging than European data, but was not enough to trigger US Dollar demand.
The weekly wild card
Much of what happened across the FX board resulted from sentiment, the latter coming from the solid performance of worldwide equities. Stock markets rallied, with several major indexes reaching record highs across the globe. The catalyst was Nvidia (NVDA), an American tech giant currently focused on generative AI, as the company reported upbeat earnings and revenues, boosting the tech sector. In the US, the Dow Jones Industrial Average and the S&P 500 closed at record highs on Thursday, while the Nasdaq Composite neared all-time highs. The optimism spread overseas, with the Japanese Nikkei 225 and the pan-European Stoxx 600 also hitting record levels.
Stocks’ strength helped EUR/USD remain green despite the economic strength imbalances between the United States and the Eurozone. The big question is whether optimism could be enough to limit the US Dollar’s demand as government bond yields pressure multi-week highs.
What’s next on the macroeconomic front
The US will publish January Durable Goods Orders and a revision of the Q4 Gross Domestic Product (GDP), which is expected to confirm an annualized growth of 3.3%. Things will turn more interesting on Thursday when the country will unveil the Core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) favorite inflation gauge. Core PCE inflation is expected to have risen by 0.4% MoM in January, doubling the 0.2% posted in December. Additionally, the February ISM Manufacturing PMI will be out on Friday.
Across the pond, the focus will be on inflation. Germany and the Eurozone will release their respective Harmonized Index of Consumer Prices (HICP) for February.
EUR/USD technical outlook
From a technical point of view, the EUR/USD pair is still at risk of turning lower. The pair trades just above the 23.6% Fibonacci retracement of the 1.1139-1.0694 daily slump at 1.0799 but below the 38.2% retracement at 1.0865. The weekly chart shows the pair posted a higher high and a higher low, usually anticipating more gains in the docket. However, the pair would have better chances if it runs past the 1.0900 mark.
Meanwhile, the pair hovers around a directionless 20 Simple Moving Average (SMA) in the mentioned chart, while the 200 SMA stands flat at around 1.1180. At the same time, the Momentum indicator maintains its bearish slope just below its 100 line, while the Relative Strength Index (RSI) indicator bounced from its midline and aims marginally higher within neutral levels. As a result, there are no clear directional clues, and the pair may well turn south in the upcoming sessions.
The daily chart shows that EUR/USD advanced with uneven strength for eight consecutive days but that the bullish momentum declined. The pair is currently battling a flat 200 SMA while developing above the 20 and 100 SMAs, both standing a handful of pips below the current level. The fact that moving averages are developing within a tight 50-pip range clearly indicates absent directional strength. Finally, technical indicators advance within positive levels and with uneven strength, limiting the downside in the near term.
A bullish breakout of the weekly high in the 1.0880 price zone could expose the 1.0930 area en route to 1.0980. On the other hand, a break below 1.0800 exposes the 1.0690-1.0710 region, while once below the latter, EUR/USD could fall towards 1.0620.
