Global Institute of Trading

EUR/USD outlook

Russa-Ukraine war has caused some stir in the markets, especially in the EUR pairs. EURUSD has been in a steady decline for some time now, but is it time for a rebound?

Overview of the EUR

EUR/USD is languishing below 1.0900 and barring a surprisingly hawkish ECB meeting on
Thursday, EUR/USD should stay soft. Indeed, some argue that with 65bp of ECB hikes now priced
in by year-end, it is actually difficult for the ECB to deliver a hawkish surprise.

In terms of geopolitics, the world is bracing for an intensification of hostilities in eastern Ukraine.
Europe has yet to go so far as to place an embargo on Russian oil, but clearly that is the risk
over the coming months. Such action may cost Eurozone growth anywhere between 1% and
3% and add a new layer of bearishness to the euro.

For today, look out for another plunge in German ZEW investor expectations – perhaps
matching the extreme pessimism seen in March 2020. And late next week, we will start seeing
the releases for the March PMIs across Europe – which will be the first chance to look at the
damage done to business confidence. EUR/USD could drift down to the 1.0800/0820 area today
if US CPI sees US 10 year Treasury yields push higher and the German ZEW is as bad as
expected.

USD overview

Consensus expects today’s US March CPI release to push up to a new cycle high of 8.4% year-
on-year and core rising to 6.6% year-on-year. Although it seems extreme, this kind of number

should support market expectations that the Fed will take the policy rate towards the 2.50%
area by year-end. Notably, market-derived inflation expectations such as the 5Y5Y inflation
swap forward and inflation-protected Treasuries still show longer-term inflation expectations on
their highs in the 2.80-3.00% area. This will serve as a reminder that the Fed is still in the mode

of gaining control of inflation expectations – i.e. sounding very hawkish.
On the subject of the Fed sounding hawkish, Fed dove Lael Brainard speaks at 1810CET today.
Recall how she triggered a sell-off in the US Treasury market last week by suggesting the Fed
needed to shrink its balance sheet and fast. US 10 year Treasury yields are now close to 2.80%,
with 3.00% beckoning.


A hawkish Fed remains very much behind dollar strength – as is the war in Europe. DXY is now
nudging above the 100 area and we see no reason why it cannot continue to push on to
100.80/101.00. Equally, USD/JPY has broken clear of the 125.00 area and gains could accelerate
on a technical break of 125.85 – the high in 2015.

EUR/USD Technicals

When looking at the EUR/USD in a technical view, the pair has a bit of a barrier to break before we can head lower. 

ING, Credit Suisse, and MUFG are among the few that were shorting EURUSD in the month of April with views that the pair could reach 1.08 – 1.07 before finding some support. With the pair now resting at 1.08100 level, could this be the short-term rebound we need in order to look for more shorting opportunities? 

My personal view is we’ll get a steady bounce off of the 1.08100 level for a push back into 1.10800 where I’ll continue to look for shorts. For counter-trend traders, (and pure technical analysis traders) this could be a potential buying opportunity to bring the pair back into 1.10 area. 

Will rally's be short-lived?

If you look at the overview fundamentals of the market then EUR/USD should still be a bearish trade, given the fact that the Fed has a hawkish stance and is in the mode of ongoing inflation control.

Lael Brainard triggered a sell-off in the US Treasury market last week by suggesting the Fed needs to shrink its balance sheet. US 10 year Treasury yields are now close to 2.80% with 3.00% beckoning. (Hawkish) 

With the war in Europe, the DXY is teasing the 100 level which gives us an indication that there is no reason it couldn’t reach 101. 

a hawkish ECB meeting on Thursday last week, some argue that 65bp of ECB hike now priced in by year-end, it’s actually difficult for the ECB to deliver a hawkish surprise. If you look at the German ZEW we’re seeing a bit of a plunge. Why is the ZEW important? Because this is the economic sentiment index. 

When we start seeing the release of PMI across Europe we’ll see the damage done to a lot of confidence in businesses. If US CPI sees US 10 year Treasury yields push higher and German ZEW push lower, we can expect a bearish market for EUR/USD

Conclusion

Although some traders like to focus on pure technical analysis and will most likely want to buy at these levels, (that’s okay if that’s what you’re into) be mindful of what could continue to come for EUR and USD. Our overview is a continue short opportunity in EUR/USD for a push to 1.06

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