What now for the US dollar?
That’s the key question after Wednesday’s softer data releases caused the greenback to fall across the board, underscoring the view that the economic growth is losing momentum and that inflation is heading lower.
The dollar selling took a pause overnight and the greenback was stable during the first half of the European trade, ahead of the release of jobless claims data which came in weaker than expected.
We also had a few other US macro pointers that disappointed expectations, including housing starts and building permits, while a sizeable jump in import prices discouraged traders from selling USD as this points to rising inflationary pressures.
Despite this and the slow start to today’s session, the recent price action and improving eurozone sentiment suggests the EUR/USD outlook remains positive, with the exchange rate on course to head towards the 1.10 handle in the coming weeks potentially.
Before discussing the macro events in greater detail, let’s have a quick look at the EUR/USD chart following Wednesday’s big breakout.
EUR/USD technical analysis and trade ideas
Unsurprisingly, the EUR/USD has fallen back amid profit-taking after Wednesday’s data-driven rally. But with several key resistance levels broken, the path of least resistance remains to the upside.
The first short-term potential support level to watch is around 1.0850-1.0860, an area which failed to offer resistance during Wednesday’s melt up, despite it being a prior support zone. Now that we have broken above here, we could well see a potential bounce around this area, which was being tested at the time of writing.
Further lower, the key support to watch is now between 1.0800 to 1.0825 area, which marks the point of origin of this week’s breakout.
On the upside, 1.0900 is likely to be the next bullish target ahead of the key 1.10 handle thereafter.
US jobless claims disappoint but import prices jump
We have just seen the release of a few second-their data on the US economic calendar.
The latest jobless claims data, which was expected to show a drop in applications to 219K vs. 231K the previous week, came in at 222K, continuing the recent disappointing trend.
Also disappointing expectations, was the Philly Fed manufacturing index, which dipped to 4.5 compared to 7.0 expected, down sharply from 15.5 previously.
What’s more, building permits came in at 1.44 million versus expectations of a rise to 1.48 million annual pace, from 1.46m previously.
However, despite these data misses, the dollar bears were put off by the fact import prices jumped by 0.9% m/m compared to a small rise of 0.2% expected. Rising import costs will only add to inflationary pressures.
Meanwhile, industrial production data, scheduled for release later, is seen printing +0.1% m/m.
Will the dollar selling continue?
The dollar bears, and the EUR/USD bulls, will be looking for more evidence of a cooling US economy, especially the labour market. Market expectations have shifted to anticipate two rate cuts this year for the first time in a month, although three cuts could be a possibility should the recent trend of weaker US data continues.
The above-mentioned data as well as some other second-tier data to come in the next two weeks aside, there are no major US macro pointers scheduled until the final day of the month when core PCE is released, a week before the May jobs report comes out. Until then, I would expect to see some further dollar selling but at a more gradual pace.
So, I reckon the EUR/USD is going to find buyers on the dips and edge towards the 1.10 handle.
Recent weakness in US data have inspired traders to sell into the dollar’s recovery attempts.
Wednesday’s CPI print missed expectations with a +0.3% m/m reading, and we also saw a flat headline retail sales figure, when a 0.4% increase was expected. What’s more, the Empire State Manufacturing Index painted another gloomy picture for the manufacturing sector, with yet another below-forecast negative reading (-15.6 vs. -9.9 expected).
This week’s disappointing data comes after the April non-farm jobs report, the latest ISM surveys and several other pointers, all disappointed expectations earlier this month.
So, it looks like the US economic recovery is slowing, and this will help bring inflation down, reducing the need to keep monetary policy tight for an extended period of time. The Fed’s tapering of its balance sheet runoff has been an additional bearish factor for the dollar.
Dollar also weighed down by external factors
Meanwhile, external factors are also helping to weigh on the dollar. The big recovery in Chinese markets and the copper rally all seem to indicate that China has turned a corner. What’s more, we have seen improvement in Eurozone and UK data too, boosting the appeal of the euro and pound.
ECB likely to cut interest rates June
The European Central Bank is expected to cut rates in June, which is fully priced in. But the recent improvement in data means the central bank is likely to be far less dovish in its guidance about future rate decisions. The EUR/USD outlook is unlikely to be impacted by any further ECB talk of a June cut, as this is now baked in.