EUR/USD Technical Analysis and Outlook
The EUR/USD currency pair ended the past week on a sour note as it posted its lowest weekly close in two months on Friday. However, according to analysts at MUFG, a leading financial institution, the dollar has room to rise further while the euro could head toward the 200-day Moving Average.
In the past week, the EUR/USD currency pair has broken below the key psychological level of 1.06000. Analysts now expect the pair to fall toward support from the 200-day Moving Average (DMA). This recent move in the pair can be attributed to strong US activity data and a hawkish outlook from the Federal Reserve.
The US economy has shown signs of strength in recent months, with data releases such as GDP, Consumer Price Index, and employment figures above expectations. This data has led to increased expectations of a rate hike from the Federal Reserve, which has, in turn, strengthened the dollar.
The 200-day DMA is currently hovering around the 1.0330 level, and if the EUR/USD continues to weaken, it may find support at this level. However, if the pair breaks below this level, it could trigger further downside momentum.
Nordea Analysts Take
Economists at Nordea, a leading Nordic financial institution, have suggested that central banks worldwide must continue raising interest rates. They believe that keeping rates short-term is not a viable option and that long-term rates must be increased to combat inflation and other economic challenges.
By the end of 2023, Nordea’s economists expect the Federal Reserve’s benchmark interest rate to approach 6%, while the Eurozone’s rate is expected to reach around 4%. They also anticipate that US yields will continue to rise, targeting a 4.5% Treasury yield.
This projection is largely driven by concerns over inflation, which has increased in many parts of the world. Inflation can diminish the value of savings and investments, leading to higher borrowing costs for consumers and businesses.
As a result, central banks typically raise interest rates to combat inflation by making borrowing more expensive and reducing the amount of money in circulation.
St. Louis Federal Reserve President James Bullard has commented on the current state of the markets, noting a broad sense of probabilities around a changing fiscal stance and a more aggressive Federal Reserve.
Bullard’s comments suggest that the markets anticipate fiscal and monetary policy changes and that the Federal Reserve may aggressively raise interest rates to combat inflation. However, inflation will likely come down in the next few months, which could ease some of the concerns driving up inflation expectations in recent months.
Despite Bullard’s comments, the dollar index remains above 105.4, indicating that the market may not be fully convinced that inflationary pressures will decrease soon. However, Bullard suggests that a “soft landing” for the economy is possible, which would gradually reduce inflationary pressures without causing a sharp slowdown in economic growth.
Conclusion
Inflation remains a concern for many central banks worldwide, and they may need to continue raising interest rates to combat it. These market factors could significantly impact currency pairs like EUR/USD long-term. Therefore, it’s important to monitor economic data releases and central bank communications to stay informed about potential movements in the currency pair.