EUR/USD outlook: Markets not out of the woods yet

Market turbulence often presents lots of opportunities, but there is still excess froth to be shed as the unwinding of leveraged carry trades persists for now. The EUR/USD was trading lower along with gold and major European indices in the first half of Tuesday’s session. Although US indices, Nikkei futures, USD/JPY, and commodity-linked currencies—assets that had been under significant pressure—rebounded from their lows on Monday, the recovery didn’t gain much traction overnight, and so the underlying trend that has been dominant in the last few days seems to have resumed in the first half of Tuesday’s trading. This indicates that we might not be out of the woods yet, though conditions could stabilise as the week progresses. With a quieter US economic calendar ahead, there will be fewer new recessionary signals to unsettle traders, and the potential for supportive comments from Federal Reserve officials could ease market pressure. For now, the greenback has rebounded, helped in part by the stronger ISM services PMI. Still, in light of the recent events and expectations of a sharper pivot by the Fed than was previously expected, the EUR/USD outlook remains mildly positive.

Weaker Eurozone retail sales hurt euro

Today, the EUR/USD was actually trading lower and couldn’t extend its two-day rally. The euro was hurt by an unexpected 0.3% month-over-month decline in Eurozone retail sales. This has helped the dollar index recover from its multi-month lows.

Still, while the EUR/USD seems constrained at the moment, I believe that once the equity markets stabilise, we could see the euro and other major currencies strengthen more significantly against the dollar. The greenback has lost some of its yield appeal following a series of weak economic indicators pointing to a potential recession. Currencies where interest rates are much lower such as the yen, franc, and yuan have been among the major beneficiaries of a weakening US dollar so far. But that could well change.

EUR/USD technical analysis

Source: TradingView.com

The EUR/USD has hit resistance after trying unsuccessfully on Monday to stage a decisive breakout above the 1.10 handle. While it rose to its best levels since January, it then dipped on the back of the ISM services PMI data which came out stronger. It has since remained under mild pressure. Still, in light of the big drop in bond yields and expectations of a sharp pivot by the Fed, the EUR/USD outlook remains positive.

In terms of support levels to watch, the area near 1.0900 is the first line of defence for the bulls, followed by 1.0835, which will need to hold to maintain a bullish technical outlook on the EUR/USD.

In terms of upside hurdles, resistance is seen at 1.1000 which was tested on Monday and held firm. A break above it could pave the way for a run towards the prior highs of 1.1140 (December) and 1.1275 (last July).

The technical EUR/USD outlook has turned mildly bullish ever since it broke above its bearish trend line that had been in place since last July. Until something changes to suggest the bears are back in full control, the bulls will remain happy so long as we don’t break important support levels such as those mentioned above.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.