Suppressed Weekly Range Emphasises Key Levels

Euro Weekly Forecast: Neutral

• EUR/USD grinds higher but lacks conviction – key levels considered
• EUR/JPY positioned for ST pullback while bullish advance is still in play
• EUR/JPY positioned for near term pullback while bullish advance is still in play
• Major risk events: EU & UK inflation, US retail sales and UK jobs data

Euro Drivers Absent – What is Likely to Move the Euro?

With the majority of major central bankers reaching consensus that interest rates have probably reached their peaks, we enter a period where markets will be on the lookout for who blinks first.

Interest rate expectations currently price in somewhere between 6 or 7 cuts for the dollar and the euro, while the expectations around the pound have made up plenty of ground, now projecting somewhere between 5 or 6 cuts in 2024. Yesterday’s UK GDP print, although surprising on the upside, offered up a stark reminder that the UK economy hobbles on and could still confirm a technical recession when next month’s GDP data for December is released.

EU sentiment data has eased in recent months but still makes for bleak reading, while the stagnant economy finds itself in a similar situation with the UK. One piece of data next week has the potential to prompt a lift in the euro is the EU inflation figures however, today’s French and Spanish figures were as expected, suggesting inflationary pressures may have calmed to a level that is more predictable for economists.

EUR/USD Grinds Slowly Higher but Lacks Conviction – Key Levels Considered

EUR/USD revealed a period of consolidation after the selloff at the turn of the new year and has given away very little as far as future price action is concerned. Throughout the last week, there has been a notable focus on the emergence of what appeared to be a bearish flag pattern, which is yet to be invalidated but has also lacked bearish momentum.

Ahead of the US CPI, the zone around two notable Fibonacci levels was highlighted for its potential to provide resistance. This was the zone (rectangle highlighted in orange) connecting the 61.8% Fibonacci retracement of the major 2023 decline and the 50% Fib retracement of the longer-term 2021 to 2022 major decline. At the end of the week, the pair looks set to close above the zone, setting up a potential test of the November swing high of 1.1017.

Price action trades above the 200 simple moving average and so the short-term rise remains in play but there is seemingly little to suggest it will be followed by sufficient momentum. Therefore, in this instance, a rejection of 1.1017 could result in price action heading lower – setting up potential range trading opportunities.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

The weekly chart helps to confirm the level of resistance (1.1033) that prevented a bullish continuation. The level was identified as a potential area of consideration for a short setup in our new Q1 forecast for the euro – which can be downloaded via the banner below:

EUR/USD Weekly Chart

Source: TradingView, prepared by Richard Snow

EUR/JPY Positioned for Near Term Pullback while Bullish Advance is Still in Play

EUR/JPY has been rather flattering for the euro of late, advancing due to Japanese fundamental factors and less so due to EU specific influences. Easing Japanese inflation and wage growth data has cooled the sense of urgency around the inevitable Bank of Japan policy reversal.

As such, EUR/JPY moved above a key zone of resistance at 157.93/158.00 which now acts as support. The pair has adhered to technical suggestions over the last two weeks as the initial bullish advance consolidated via a bull flag pattern before continuing higher.

EUR/JPY surrendered a portion of this week’s gains on Thursday and Friday, dipping below the 50 SMA with that key 158 level in sight. Armed with this information, it may be constructive to anticipate a deeper pullback at the start of the week with bullish momentum anticipated to return should 158.00 propel prices higher thereafter.

EUR/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

EUR/GBP Exhibits Mean Reversion Tendencies but Struggles to Lift off Support

EUR/GBP showed early signs of mean reversion during this last week but ultimately drifted back lower on Thursday and Friday to close the week nestled against trendline support. The MACD reveals that momentum favours the downside, something echoed by the 200 SMA that resides above price action.

Therefore, trendline support may come under early pressure next week but in the event it holds, the pair may continue to exhibit its mean reversion tendency towards 0.8635. Taking a step back, viewing price action from a distance, it is possible to see the effect of 0.8635, forming resistance between June and October 2023 but it also splits price action horizontally down the middle, between the major high and low.

EUR/GBP Daily Chart

Source: TradingView, prepared by Richard Snow

Major Event Risk in the Coming Week

EU centered data is rather scarce next week with the ZEW economic sentiment readings and final inflation data for December due. Other notable standouts include US retail sales for December (festive period) and UK jobs and inflation data.

However, EU data continues to be on the light side but the above-mentioned data points highlight the potential for market moves in some of the other major currencies when analysed alongside the euro.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX