EUR/USD in Focus as US Dollar Faces Test From Key Data

• EUR/USD holds above key support as the dollar regains modest ground.
• Upcoming US data, including GDP and core PCE, could challenge rate-cut expectations.
• Technical structure still favours the upside—unless 1.1750 gives way.

The US dollar has been gaining back some ground in the last few days, though that could change again as we transition to the second half of the week where economic data will come into focus again. The USD rose most meaningfully against the NZD overnight following a far less hawkish RBNZ tone than the markets had priced in. The greenback also gained ground against other currencies, including the recently lively yen and the more stable euro. The latter managed to hold its own above the key 1.1800 handle yesterday, a level which will be pivotal shaping the near-term EUR/USD direction.

US Data Comes Back Into Focus

Overall, interest rate expectations are unlikely to drift too far from centre stage, keeping the EUR USD exchange rate in neutral-to-positive territory.

The dollar has been edging higher this week, essentially falling back in line with the more upbeat tone in recent US data. That story could continue today, should we see above-forecast readings on durable goods, industrial production and some housing market data. Later on, we’ll get the minutes from January’s FOMC meeting, which should confirm a fairly solid consensus around staying on hold for now. This is priced in and I wouldn’t think it would give the dollar any meaningful support.

More meaningful data is coming out on Friday. We’ll see a batch of global PMI figures, along with US GDP and core PCE inflation – the Fed’s preferred inflation gauge. GDP is seen coming in at a decent annualised rate of 3% against a prior reading to 4.4%. Watch out for GDP components such as personal consumption to gauge the strength of US consumer.

Any soft prints in the data could see the dollar resume its slide.  Data aside, the main uncertainty hanging over the dollar is the likely arrival of Kevin Warsh as Fed Chair in May and what that means for the future direction of policy.

However, if this week’s US data come on the stronger side, that may take some of the edge off market pricing for rate cuts this year, which is currently around 60bp.

Not Much From the EUR Side to Get Excited Over

Flash eurozone PMIs later this week could offer the euro some backing, while more meaningful eurozone numbers on the economic calendar is due next week. Highlights will be from Germany when Ifo Business Climate (Monday), GfK Consumer Climate (Tuesday) and CPI (Friday) will be released. With the EUR/GBP bias also tiled to the upside owing to weakness in UK data, while some haven demand comes out of the EUR/CHF pair, this should provide ample support for the euro, keeping the EUR/USD’s downside limited.

EUR/USD Technical Analysis

From a technical point of view, the EUR/USD chart still points towards the upside, given the fact that it has been making higher highs and higher lows for quite a while now. The trend is mature, and price has been climbing above key resistance levels and moving averages, establishing trend lines, and so on. Against this kind of backdrop, it makes it difficult to be bearish on the euro.

The key support area to watch continues to remain between 1.1750 and 1.1800. This area was a key resistance zone that was taken out during the sharp rally we saw towards the end of January. Following that breakout, we saw EUR/USD head above the 1.20 handle, at least for a while, before pulling back.

So, the path of least resistance is still to the upside, in my view. It’s just that the pair is currently lacking fresh stimulus to push significantly higher from here, which may come in the form of weaker-than-expected US economic data going forward.

Key resistance comes in around the 1.19 zone, which acted as both prior support and resistance. Before that, 1.1850 stands out as interim resistance. If we get a break above the 1.1900 to 1.1920 area, that could pave the way for another run towards the 1.20 handle. Beyond that, this year’s high sits just below the 1.21 handle.

But we’ll cross that bridge when we get there. For the time being, let’s just keep an eye on the key short-term levels mentioned. Things would turn a little more bearish, however, if the 1.1750 support gives way. In that case, we could see further downside towards the 200-day moving average and the bullish trend confluence around the 1.1650 area.

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