EUR/USD: High bar for US economic data creates asymmetric upside risks

• EUR/USD rebound stalls at resistance zone around 1.0800
• On a relative basis, eurozone economic data is surprising to the upside more than US data at rates not seen in more than a year
• With such high expectations for the US economy priced in, any disappointment could spark meaningful upside for EUR/USD

US and euro area economic outlooks diverge

When you look at the US dollar and euro in isolation, there’s a lot of good news priced into the former with a lot of pessimism priced into the latter, explaining why EUR/USD sits where it does on the charts. However, with those views firmly in entrenched, it’s now up to incoming data and news flow to continue fuelling the narrative, otherwise it risks sparking a reversal either by weakening the dollar or strengthening the euro, or both. We may be seeing the inception of such a move right now.

But with high expectations for the US economy comes increased risk of disappointment

While on a relative basis the outlook for the United States economy remains far stronger than that of the euro area, it’s obvious those expectations are slowly starting to shift. Eurozone economic data has been, on balance, surprising on the upside for much of the year, according to Citi’s economic surprise index, while net surprises in the United States have turned negative, falling to levels not seen since January 2023.

When looking at the difference between the scores of the two regions, positivity has swung sharply in favour of the euro area, a performance in stark contrast to the middle of 2023 when data from the continent was disappointing relative to the US at rates not seen outside of crisis periods such as the pandemic and GFC.

Source: Refinitiv

With such a high bar for US data to impress relative to that from the eurozone, this trend could easily extend further, providing a potential catalyst to spark further upside for EUR/USD.

EUR/USD bulls battling bears around resistance zone

If that is to take place, EUR/USD needs to clear a stubborn resistance zone located around 1.0800, coinciding with the intersection of horizontal resistance with the 50 and 200-day simple moving averages. Attempts to break this zone have been thwarted over the past fortnight, underlining its importance in a week laden with risk events.

With momentum to the upside and a high bar for US inflation data to continue unwinding dovish Fed bets, you get the sense directional risks for EUR/USD are asymmetric near-term with US data weakness likely to spark a significantly larger move to the upside than what stronger data may deliver to the downside. As such, buying dips or breaks is preferred to selling rallies.

Buying EUR/USD breaks or dips preferred to selling rallies

Should EUR/USD manage to break and hold above the resistance zone located around 1.0800, it will allow for fresh longs to be established with a stop loss below 1.0780 for protection. The downtrend running from the start of the year would be the first hurdle for bulls to overcome, followed by 1.0885, the high struck on April 9. Beyond, EUR/USD struggled beyond 1.0950 either side of the calendar turn, making that an appropriate zone to reassess longs if and should the price get there.

Should EUR/USD pullback from current levels, the strong bounce from support at 1.0725 indicates the pair my find renewed buying interest from this level, potentially providing a level to establish long positions just above with a stop loss for protection below. The same upside targets mentioned above would be relevant for such a trade.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

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

1. 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
   
   
2. Search for the market you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade