EUR/USD: upside potential as economic expectations converge

A lot has been thrown at the EUR/USD recently – a resurgent USD, spluttering growth in China, its major export market, along with diminishing risks of further rate hikes from the ECB, just to name a few. Yet, despite those headwinds, the pair is holding up alright.

With so much bullish sentiment out there towards the near-term US dollar outlook, at a time when the pair is sitting at the intersection of major support levels, there’s grounds for a potential bounce in EUR/USD or perhaps something even more.

US economic data has impressed recently

One of the drivers behind the recent USD resurgence has been the outperformance of the US economy relative to other parts of the world, at least when it comes to expectations.

The chart below shows Citigroup’s Economic Surprise Index for the USD, displayed in black, against the EUR in blue. The index represents the sum of the difference between actual economic data relative to the median economist forecast. When above 0, the data is typically topping expectations. A score below 0 indicates the data is undershooting forecasts. The further away from 0, the greater the magnitude of the beats or misses.

Just last month, Citi’s USD reading topped +80. In contrast, EUR was sitting close to -150. Given the vastly divergent indicators on the trajectory for economic growth, it’s little wonder EUR/USD dropped around five big figures in the space of a few weeks.

Converging growth outlooks may support EUR/USD

But as the arrows on the chart indicate, positive data surprises in the States are becoming less frequent while data misses in Europe look to be slowly turning around, suggesting a continued convergence in the relative growth outlooks could lead to renewed upside for EUR/USD.

Looking at the daily chart, EUR/USD sits at the intersection of numerous levels -- the 200-day SMA, the uptrend from March and horizontal support at 1.0800 which has also acted as resistance dating back several years. This support zone offers protection for traders looking for a bounce in EUR/USD. A stop-loss order below last week’s low of 1.0770 should help limit losses should the trade thesis be incorrect. On the topside, the pair has done some work around 1.1000 in the past with a break of that level beckoning a potential move back to a more meaningful resistance located above 1.1065.

-- Written by David Scutt

Follow David on Twitter @scutty

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