EUR/USD Could Head to 1.05 Amid Deteriorating Macro Backdrop

So far this week, the FX markets have continued to head in the same direction of dollar strength following last week’s US election results. The dollar is strengthening amid expectations for a higher terminal interest rate from the Fed, owing to Trump’s inflationary fiscal policy.

In contrast, currencies set to be hit the hardest from Trump’s tariffs continue to underperform – such as the CNY and EUR. Thus, the EUR/USD remains on a negative path, with the exchange rate likely heading towards $1.05, barring a very weak US CPI report today.

Greenback Remains on Front Foot After Trump’s Emphatic Victory

Investors are continuing to digest Trump’s emphatic victory last week. While his policies might take a while to implement, this time many expect him to hit the ground running in January due to his prior experience when he took charge in 2017. For this reason, we have seen the dollar going from strength to strength, rather than taking a pause or reversing immediately.

It looks like traders are unwilling to step in front of this dollar rally just yet. Foreign currencies that are expected to be the hardest hit from Trump’s protectionism and tariffs are leading the way lower. Chief among them are the yuan and euro. The latter is now on the verge of taking out the $1.06 level decisively after extending its post-election losses this week.

US CPI Data Unlikely to Threaten Dollar Rally

Let’s see if this week’s upcoming inflation data on the economic calendar changes that narrative. It will be interesting to observe how the greenback would react to potentially weaker-than-expected CPI today or PPI data tomorrow. My view is that any dollar weakness as a result of these figures is likely to be short-lived. The rationale is that once Trump takes charge, his large spending and tax cut plans should then pave the way for a fresh wave of inflation.

October CPI is expected to print +0.2% month-month, which, if correct, is seen pushing up the year-over-year rate to +2.6% vs. +2.4% in September. Core CPI is expected at +0.3% m/m or +3.3% y/y.

Euro Dented Further by Political Uncertainty in Germany

Yesterday’s release of German ZEW economic sentiment disappointed expectations and weighed on the euro. It came in at 7.4 compared to 13.1 in October, and well below the expected figure. Deteriorating sentiment in the Eurozone has also weighed heavily on the stock markets where major indices like the DAX plunged.

Also hurting risk assets and the euro is ongoing political uncertainty in Germany. On Monday, German Chancellor Olaf Scholz said he would be willing to call a vote of confidence before Christmas. This could pave the way for snap elections, and potentially big policy changes in the coming year.

Continued China Weakness Additional Bearish Factor

This comes as investors are assessing the likelihood of trade tariffs following Trump's victory last week. The already weak Eurozone economy could be hit with 10% to 20% tariffs on the goods it exports to the US. What’s more, trade tariffs of 60% on China could also negatively impact the Eurozone economy.

China is already struggling under a property crisis, and despite several rounds of stimulus announcements, the equity market there continues to fall alongside the yuan. With China being a key trade partner for Europe, particularly Germany, and further weakness there will directly impact growth here. Judging by this week’s release of inflation data, domestic demand remained weak as producer prices declined by 2.9% year on year.

EUR/USD Technical Analysis and Trade Ideas

From a technical point of view, the lower lows and lower highs mean the EUR/USD’s path of least resistance remains to the downside as rates test the 1.0600 handle. Yesterday, it broken April’s low of 1.0601 and hit a fresh year-low of 1.0595, before rebounding slightly into the close back above the 1.0600 handle. But as more and more support levels give way, the selling pressure is increasing.

EUR/USD-Daily Chart

Thus, there is a risk we could potentially see the EUR/USD drop to 1.0500 sooner than one would have otherwise expected. Could we get there this week?

In terms of resistance, 1.0650, 1.0700 and 1.0770 are the next three hurdles to watch, with the latter also marking the underside of the broken trend line that had been in place since October of last year. This level is now the line in the sand insofar as this bearish technical outlook is concerned.

So, how to trade the EUR/USD? Well, I would keep it simple. Until and unless the EUR/USD forms a major bullish reversal signal, any short-term strength should be viewed as a counter trend move in the interim – even if this happens following today’s CPI report. As such, traders may wish to look for further bearish setups near resistance than try to catch the bottom near support levels, with the near-term aim of reaching that $1.05 handle.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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