Most Read: Euro’s Outlook Turns Bearish After ECB Decision, Setups on EUR/USD, EUR/GBP

The euro suffered a major setback this week, primarily against the U.S. dollar, though it also lost some ground against the British pound. The European Central Bank’s dovish stance during its April meeting laid the groundwork for the common currency’s downturn, which was further exacerbated by heightened geopolitical tensions in the Middle East leading into the weekend.

ECB Turns Dovish

At its latest policy meeting, the ECB opted to leave interest rates unchanged but left no doubt about its intention to transition towards a looser position imminently amid increased confidence in the inflation outlook. This guidance prompted traders to ramp up wagers that the institution led by Christine Lagarde would launch its easing campaign at its next monetary policy meeting in June.

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Monetary Policy Divergence

The prospect of the ECB moving ahead of the Fed in terms of easing is poised to be detrimental to EUR/USD in the short run. Just a few weeks ago, there were indications that the FOMC could also act in June, but a series of hotter-than-expected U.S. CPI readings and labor market data have derailed this scenario, triggering a hawkish repricing of rate expectations that has been a boon for the U.S. dollar.

Monetary policy divergence could present challenges for the euro against the British pound as well. Although the Bank of England is also seen removing policy restraint in 2024, market pricing suggests that the first cut may not materialize until August. Moreover, traders are only discounting 50 basis points easing from the BoE, whereas they anticipate about 75 basis points in cumulative cuts from the ECB this year.

Geopolitical Tensions on the Rise

Geopolitical tensions in the Middle East are set to keep the euro on tenterhooks in the short term, though any negative impact should be more visible against the U.S. dollar, traditionally considered a safe-haven asset. Concerns about potential retaliatory actions from Iran following an attack on its Syrian embassy by Israel could escalate tensions in the region, unsettling markets and weighing on high-beta currencies.

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EUR/USD FORECAST – TECHNICAL ANALYSIS

EUR/USD has dropped sharply in recent days, breaching multiple technical floors in the process. The latest leg lower has brought the pair to its lowest point since early November of the previous year, nearing a crucial support at 1.0635. To prevent a deeper downturn, euro bulls will need to staunchly protect this zone; failure to do so may prompt a retreat towards the 2023 lows.

On the other hand, should selling pressure ease and prices begin to rebound from their current position, initial resistance emerges at 1.0695 and 1.0725 subsequently. Beyond these two thresholds, attention shifts to the 50-day and 200-day simple moving averages in the vicinity of 1.0825. On further strength, the focus will be on 1.0865, the 50% Fib retracement of the 2023 slump.

EUR/USD PRICE ACTION CHART

EUR/USD Chart Created Using TradingView

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Change in	Longs	Shorts	OI
Daily	4%	-24%	-6%
Weekly	17%	-42%	-9%

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EUR/GBP FORECAST – TECHNICAL ANALYSIS

EUR/GBP dropped moderately this week, but downside momentum faded heading into the weekend as the pair found support at 0.8525 and began to move higher off its weekly lows. If the nascent recovery continues over the next few days, resistance appears at 0.8550 near the 50-day simple moving average. Looking higher, the spotlight will be on trendline resistance at 0.8575, followed by 0.8600.

Alternatively, if bears mount a comeback and EUR/GBP resumes its downward journey, support looms at 0.8525, which represents the late March swing lows. Bulls must strive to maintain prices above this technical area to prevent a breakdown; otherwise, sellers could seize the opportunity to launch a bearish assault on the 2023 lows.

EUR/GBP PRICE ACTION CHART

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U.S. Dollar

DXY 120424 4h Chart
U.S. Dollar Index tested new highs as traders reacted to the Michigan Consumer Sentiment report, which indicated that Consumer Sentiment declined from 79.4 in March to 77.9 in April. The report has also shown that consumer inflation expectations have increased, which was bullish for the U.S. dollar.

In case U.S. Dollar Index manages to settle above the resistance at 105.75 – 106.00, it will move towards the next resistance level at 107.10 – 107.35.

EUR/USD

EUR/USD 120424 4h Chart
EUR/USD remains under strong pressure as traders bet that ECB would be more dovish than Fed this year. The pullback in Treasury yields did not put any pressure on the American currency.

The nearest support level for EUR/USD is located in the 1.0600 – 1.0620 range. In case EUR/USD settles below the support at 1.0600, it will head towards the next support level, which is located in the 1.0500 – 1.0520 range.

GBP/USD

GBP/USD 120424 4h Chart
GBP/USD tests new lows as the pullback continues. Traders stay focused on general strength of the U.S. dollar.

A successful test of the support at 1.2425 – 1.2450 will open the way to the test of the next support level at 1.2320 – 1.2335.

USD/CAD

USD/CAD 120424 4h Chart
USD/CAD is moving higher as commodity-related currencies are losing ground despite the strong rally in precious metals markets.

From the technical point of view, USD/CAD needs to settle above the resistance at 1.3780 – 1.3800 to gain additional upside momentum.

USD/JPY

USD/JPY 120424 4h Chart
USD/JPY settled above the 153.00 level as traders waited for additional catalysts. There are no signs of interventions from the BoJ, which indicates that Japan’s central bank believes that USD/JPY may move even higher.

In case USD/JPY settles above the recent highs at 153.38, it will gain additional upside momentum and move towards the 155.00 level.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

• The British pound initially rally during the trading session on Thursday to reach the 200-Day EMA, but then turned around to show signs of negativity.
• By doing so, it looks like we are trying to form an inverted hammer, and it’s probably worth noting that this inverted hammer sits on top of the 1.25 level, an area that is obviously a large, round, psychologically significant figure, and an area that has seen a lot of support previously.

What makes me pay close attention to this area is because I am seeing a lot of currencies give up initial gains against the US dollar, and that suggests to me that we will continue to see the US dollar try to strengthen, because it’s not just against the British pound that I’m see in this action, it’s also the Australian dollar, the euro, and several others. If the GBP/USD pair does break down below the 1.25 level, then it’s likely that this pair drops rather significantly, perhaps as low as the 1.22 level underneath.

Support

This is an area that I would expect a certain amount of support, so if we turn around and take out the 200-Day EMA on a bounce, then I think you have a real shot at the British pound going higher to reach the 1.27 level, and then eventually the 1.28 level which is a major resistance barrier. In general, I think it’s going to take some type of ship to make that happen, as we have so clearly rebuked the buying pressure that came into the picture early on Thursday. That being said, I think the Friday session is going to be crucial for the British pound as it could dictate where we go for the next 300 pips.

• 

I would expect a certain amount of volatility, but I would wait until we see some type of daily close to make a bit of a decision, because there is high probability of a significant amount of volatility in this area. In general, this is a market that I expect a lot of noise in, but I am very interested in the British pound against the US dollar at the moment, as it could be a nice set up.

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Given some evidence of US economic vulnerability, Danske Bank sees scope for a weaker dollar and the Euro to Dollar (EUR/USD) exchange rate to test 1.10 in the near term.

Although the bank has shifted its view and now thinks that the first Fed rate cut will take place in June rather than May, market expectations have already shifted, limiting any dollar support.

Danske still expects three Fed rate cuts in 2024 and a further four reductions in 2025.

Danske Bank notes that there has been a substantial build in long dollar positions over the past few weeks. This shift in positioning will leave the currency more vulnerable if there is disappointing economic news.

Although official US data has remained generally robust, survey evidence has been less impressive. Danske noted weak hiring intentions by small businesses and an easing of pricing pressures within the services sector.

Overall, the bank considers that there is liable to be economic deterioration over the second half of the year, limiting dollar support.

Danske does note that a further increase in oil prices would boost the dollar and undermine EUR/USD.

It also still expects medium-term dollar gains on superior US fundamentals with a 12-month EUR/USD forecast of 1.05.

Key Quotes:

“It is a little surprising that the USD has not had more support from the ongoing resilience of the US labour market.”
“Markets will probably take more note of this week’s March CPI print.”

“Currently, markets are pricing in 64bp of Fed easing this year and a terminal rate for the easing cycle in three to four years’ at around 3.60%.”

“The USD will move lower if that terminal rate is priced lower, but that will require weaker US data.”

“The short-end rates market is dead even at 50/50 odds for a June cut from the Fed.”

“Wednesday’s US inflation data will determine whether the market opts to retain the balanced optionality for June or remove June from consideration.”
“We still find it likely that EUR/USD could test the 1.10 level in the near future.”

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• The dollar-yen pair initially pulled back just a bit during the trading session on Thursday only to bounce again.
• Ultimately, this is a market that I think continues to see a lot of support underneath, especially near the 152 yen level.
• Now that we’ve broken through this 152 yen level, it is a sign that we are going higher. After all, the Bank of Japan has absolutely no recourse to this.

A little bit of intervention would probably only anticipate more buying down the road. There isn’t a whole lot they can do. The interest rate differential continues to pay people to own this pair. We are going to the 155 yen level, given enough time. The 152 yen level now should have a lot of market memory attached to it, so if we get anywhere near there, I’m a big buyer. I’m a buyer already. I’m already a long in this pair for the last several months and just added more over the last 24 hours.

• 

The Crucial 155 Yen Level

At 155 yen, I anticipate a little bit of psychology to come into the market and offer short-term resistance. Nonetheless, there’s nothing there that tells me that we can’t go higher. Really, at this point in time, with inflation numbers in the United States remaining pretty stubborn, the reality is that the Federal Reserve may not be able to cut at all this year. And if that’s the case, the Bank of Japan has a real problem on its hands due to the fact that it has an enormous amount of debt to finance. With that being said, they cannot handle higher rates. I do believe we continue to see the US dollar climb against the Japanese yen and several other currencies will behave the same as well.

This is a currency, the USD/JPY that simply cannot get off of its back, and I think this continues to be the case going forward. The market remains a “buy the dips” market, as it has been for quite some time.

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• GBP/USD touched its lowest level since December near 1.2500 on Friday.
• The technical outlook suggests that the bearish bias stays intact. 
• BoE-ECB policy divergence could help Pound Sterling limit its losses.

After posting small gains on Thursday, GBP/USD turned south and touched its lowest level in four months near 1.2500 in the early European session on Friday. The near-term technical picture shows that the bearish potential remains intact but an extended slide in the EUR/GBP pair could help GBP/USD limit its losses.

Mixed macroeconomic data releases from the US caused the US Dollar (USD) rally to lose steam on Thursday and allowed GBP/USD to edge slightly higher. Additionally, the decline seen in EUR/GBP after the European Central Bank (ECB) policy announcements suggested that Pound Sterling managed to capture capital outflows out of the Euro.

EUR/GBP continues to edge lower early Friday, further helping Pound Sterling limit its losses against the USD. Bank of England (BoE) policymaker Megan Greene said on Thursday that the services inflation in the UK was much higher than in the US and added that rate cuts in the UK should “still be a way off.” On the other hand, markets are fairly certain that the ECB will lower key rates in June and continue to ease the policy in the second half of the year. 

In the meantime, the USD benefits from escalating geopolitical tensions and growing expectations that the Federal Reserve (Fed) will hold the policy rate steady in June after strong inflation readings for March.

The US economic docket will not feature any high-tier data releases on Friday. In case safe-haven flows dominate the action in financial markets ahead of the weekend, GBP/USD could have a difficult time holding its ground.

GBP/USD Technical Analysis

GBP/USD stays in the lower half of the descending regression channel and the Relative Strength Index (RSI) indicator on the 4-hour chart holds slightly above 30, suggesting that the pair has some more room on the downside before turning technical oversold.

1.2500 (static level, psychological level) aligns as first support before 1.2450 (lower limit of the descending channel) and 1.2420 (static level from November). On the upside, first resistance is located at 1.2550 (mid-point of the descending channel) before 1.2590 (200-day Simple Moving Average).

 

• GBP/USD touched its lowest level since December near 1.2500 on Friday.
• The technical outlook suggests that the bearish bias stays intact. 
• BoE-ECB policy divergence could help Pound Sterling limit its losses.

After posting small gains on Thursday, GBP/USD turned south and touched its lowest level in four months near 1.2500 in the early European session on Friday. The near-term technical picture shows that the bearish potential remains intact but an extended slide in the EUR/GBP pair could help GBP/USD limit its losses.

Mixed macroeconomic data releases from the US caused the US Dollar (USD) rally to lose steam on Thursday and allowed GBP/USD to edge slightly higher. Additionally, the decline seen in EUR/GBP after the European Central Bank (ECB) policy announcements suggested that Pound Sterling managed to capture capital outflows out of the Euro.

EUR/GBP continues to edge lower early Friday, further helping Pound Sterling limit its losses against the USD. Bank of England (BoE) policymaker Megan Greene said on Thursday that the services inflation in the UK was much higher than in the US and added that rate cuts in the UK should “still be a way off.” On the other hand, markets are fairly certain that the ECB will lower key rates in June and continue to ease the policy in the second half of the year. 

In the meantime, the USD benefits from escalating geopolitical tensions and growing expectations that the Federal Reserve (Fed) will hold the policy rate steady in June after strong inflation readings for March.

The US economic docket will not feature any high-tier data releases on Friday. In case safe-haven flows dominate the action in financial markets ahead of the weekend, GBP/USD could have a difficult time holding its ground.

GBP/USD Technical Analysis

GBP/USD stays in the lower half of the descending regression channel and the Relative Strength Index (RSI) indicator on the 4-hour chart holds slightly above 30, suggesting that the pair has some more room on the downside before turning technical oversold.

1.2500 (static level, psychological level) aligns as first support before 1.2450 (lower limit of the descending channel) and 1.2420 (static level from November). On the upside, first resistance is located at 1.2550 (mid-point of the descending channel) before 1.2590 (200-day Simple Moving Average).

 

A weaker economic outlook would also influence wage growth trends that could further impact private consumption.

Additionally, weaker growth forecasts would likely leave the USD/JPY at current levels as expectations of another BoJ rate hike fade.

US Economic Calendar: Consumer Confidence and Fed Chatter

On Friday, US consumer confidence figures for April will garner investor attention. Economists expect the Michigan Consumer Sentiment Index to decline from 79.4 to 79.0. Weaker-than-expected numbers could influence investor sentiment toward the Fed rate path.

Beyond the headline figure, investors must consider the sub-components, including inflation expectations. Economists expect the Inflation Expectations Index to decline from 2.9% to 2.8%.

A deterioration in consumer confidence could impact consumer spending. Downward trends in consumer spending would dampen demand-driven inflation. A softer inflation outlook could enable the Fed to cut interest rates. Moreover, downward trends in consumer spending would test bets on the US avoiding an economic recession. Private consumption contributes over 65% to the US economy.

With inflation and consumer confidence in the spotlight, investors must monitor FOMC member speeches. Reactions to the recent inflation numbers and forward guidance on monetary policy could move the dial. FOMC members Raphael Bostic and Mary Daly are on the calendar to speak.