Stagnant EU Growth Exposes Euro Vulnerabilities

Euro Weekly Forecast: Neutral

• Rampant NFP data pushes back on US rate cut hopes – propping up USD
• EUR/USD Bearish: the pair notches up fourth straight weekly decline in a row
• EUR/GBP Neutral: attempts to halt the decline at support zone
• EUR/JPY bullish: provides a bullish technical clue ahead of trading next week
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

The neutral bias of this week’s euro forecast takes into account the conflicting signals provided by Europe’s souring fundamental reality and promising, isolated technical developments for the single currency at the end of the trading week.

Rampant NFP Data Pushes Back on US Rate Cut Hopes – Propping up USD

Nonfarm payroll data on Friday revealed a red-hot jobs market, revealing nearly twice as many jobs were added to the US economy in January than was originally anticipated. Not only that, but the December figure was revised much higher, from 216k to 333k, suggesting that January simply followed on from job gains over the holiday season.

Access the full NFP report here: US Dollar Jumps After NFPs Smash Estimates, Gold Slumps

For the Fed, the monthly and yearly comparisons regarding wage growth rose to levels not seen since November 2022 and February 2023, respectively. This is likely to keep policy setters busy as they attempt to gauge the effect this may have in keeping inflation pressures lower on a consistent basis. Markets on Friday already lowered the likelihood of the first rate cut in March from 38% (yesterday) to 20.5% late on Friday (GMT). The probability stood at 46.2% a week ago. The US dollar rose sharply on Friday after markets acknowledged that the Fed may have to keep rates higher for longer and delay that much anticipated interest rate cut.

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EUR/USD Notches up Fourth Weekly Decline in a Row: Bearish

The EUR/USD weekly chart built on existing bearish momentum, taking the pair below 1.0830 with relative ease, approaching the 38.2% Fibonacci retracement at 1.0764 before potentially making a move towards 1.0700.

With a notable stepdown in ‘high importance’ economic data this week apart from the ISM services PMI print, the Friday momentum is likely to trickle into the coming week, pushing EUR/USD lower.

Source: TradingView, prepared by Richard Snow

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The EUR/USD daily chart shows the recent decline and how price action grappled with the 200-day simple moving average (SMA). A Friday close does not rule out another test of the key, trend indicator especially as price approaches a notable zone of support – the confluence of channel support and the 38.2% Fib level – where the inability to drop further may see a temporary reprieve. However, assessing the fundamental differences in the US and EU currently, alongside the longer-term bearish posture of the pair, provides a bearish weekly bias for EUR/USD

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

EUR/GBP Attempts to Halt the Decline at Support Zone: Neutral

On Thursday this week, the Bank of England (BoE) surprised many with a three-way vote split between cutting, holding, or hiking interest rates. Two of the prior three hawks remain in favour of another 25-basis point hike, while known dove Swati Dhingra signalled her preference for a rate cut.

The Bank of England revealed a lot of information this week after releasing its updated forecasts which shows inflation dropping to the 2% target by the end of the second quarter this year instead of at the end of next year as forecasted back in November. This brings rate cuts closer in theory, but signs of inflation remain in the services sector and private sector wages are still elevated, although, both are expected to moderate over time.

EUR/GBP nevertheless nestled around the major zone of support (0.8515) late on Friday, failing to extend the recent selloff. The zone has provided stern support but given the euro’s fundamental frailties, could still give way next week. In the same breath, if the support zone continues to hold as it has already this week, EUR/GBP may benefit from temporary relief with the prior swing low 0f 0.8550 the first hurdle to overcome or bulls. The above substantiates the neutral weekly bias for EUR/GBP.

EUR/GBP Daily Chart

Source: TradingView, prepared by Richard Snow

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EUR/JPY Provides a Technical Clue Ahead of Trading Next Week

EUR/JPY came under pressure after the Bank of Japan (BoJ) Governor mentioned that the likelihood of reaching the 2% target is gradually rising – stoking optimism that the Bank will step away from its current negative interest rate policy and hike into positive territory at some point this year.

The bearish momentum capitulated before the pair could even test the major pivot level of 157.90. The level witnessed pivots in June and July, as well as December and once again repelled prices upon approach. The 50-day SMA (blue line) provides dynamic support on a closing basis and the last three daily candles combine to provide a morning star pattern.

It must be noted that the bullish candle (third candle) is larger than a textbook image of the bullish candles stick pattern would suggest but prior versions of the pattern (highlighted in purple) have led to some extended moves to the upside after an immediate pullback.

EUR/JPY bulls may be eying 161.87 as a level of consideration after any shorter-term pullback plays out. The first hurdle for bears is the 50-day SMA followed by the 157.93 level of significance. The bullish candlestick pattern and its prior success, helps to inform the EUR/JPY weekly bullish bias.

EUR/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX