Today’s economic news out of the Europe wasn’t great but interestingly, the response from the euro, and to a lesser degree pound, was very subdued as both pairs refused to fall further – at least for the time being, anyway.
When the market don’t respond to news in the way one would normally expected them to, then it may be a sign of a change. In the case of the EUR/USD and GBP/USD exchange rates, it may be early signs of a potential end of the downward trend, at least in the short-term. This would actually make some sense as with much of the selling already done in the past few days, it should come as no surprise that some people are happy to bank profit ahead of the US jobs report on Friday, especially since the cable and fibre have both hit long-term support levels, too.
What’s more, the FOMC was deemed to be a little more dovish than expected on Wednesday as it indicated that the 12-month inflation outlook is expected to run near the central bank’s 2% target over the medium term. This has weighed on bond yields and in turn the dollar. Still, it is far too early to jump into any conclusions and with the dollar index turning positive on the year this week, the greenback is clearly still the currency of choice for many. Thus, the dollar’s weakness today may not last too long – especially if Friday’s monthly employment report point to a strong pickup in wage inflation. It is just that it has gone a bit too high too fast, we reckon.
European data disappoints again
As mentioned, today’s European economic data was far from impressive. In the UK, the latest data disappointment was the services PMI, which rose to 52.8 in April from 51.7 in March, but it still missed expectations of 53.5. The pound initially fell on the back of this but there’s much further follow-through. Meanwhile in the eurozone, inflation data came in surprisingly weaker than expected. Headline CPI fell back to 1.2% year-over-year in April from a downwardly revised 1.3% the month before, missing expectations of 1.3%. Meanwhile core CPI slipped to 0.7% from 1.0% previously and compared to 0.9% expected. Like the pound, the EUR/USD also initially fell on the back of the soft data before bouncing back slightly.
Oversold EUR/USD hovers around another key support
From a technical perspective, the EUR/USD does look a little oversold now, as indicated for example by the Relative Strength Index (RSI) falling below the 30 threshold level. Although the EUR/USD has broken lots of support levels, including the 2017 high of 1.2090, the 200-day average at 1.2015 and the psychologically-important 1.20 handle, it has now reached the near-term objective at around 1.1935-50 area. This area was the base of the breakout in January and corresponds with the 61.8% Fibonacci retracement against the most recent significant low that was formed in November of last year.
If the EUR/USD manages to go back above the 200-day average then this may lead to a short-squeeze rally, perhaps towards 1.2060 initially. However, if the above-mentioned support breaks down first, then there’s little further support seen until 1.1880. Conservative traders may wish to wait for price to make up its mind at this critical juncture before deciding on the direction of the trade.
EUR/USD Daily
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