EUR/USD price setup: a bit more downside within a broader consolidation?

EUR/USD short-term technical forecast – neutral

The Euro's drop below key support against the US dollar spells some more troubles for the single currency ahead of key US data this week.

Price facts

• In recent weeks, EUR/USD has pulled back from tough resistance around the 89-week moving average. However, EUR/USD hasn't broken any significant price pivot on the daily chart (relevant for positional investors), suggesting the setback so far is consolidation within a broader uptrend.

Sentiment

• IG Client Sentiment data shows 50% of traders are net-long EUR and 50% of traders are net-short EUR. The number of traders net-long is 19% lower from last week, while the number of traders net-short is 13% higher from last week.

Narrative

• Upbeat US data this month have triggered a repricing higher in Fed rate expectations and a scaling back of rate cuts later this year, taking the sting out of EUR/USD’s nearly five-month-long rally. Despite the recent narrowing of relative monetary policy differential, speculative EUR net-longs haven’t reversed, possibly reflecting relatively hawkish ECB in terms of the number of rate hikes.
  
  Meanwhile, Euro area markets have so far shrugged off the huge bond supply they are facing in 2023, i.e., the risk of sovereign stress.

EUR/USD’s drop over the past couple of weeks has almost entirely been a US strength story, rather than a Euro area weakness narrative. The US Economic Surprise Index (ESI) has risen sharply during the period, while the Euro area ESI has been largely flat, but still around 20-month highs.

EUR/USD daily chart

Surprisingly strong US data since the start of the month (from services and jobs data at the beginning of the month to PPI last Thursday) had led to a reassessment of Fed rate expectations.

Markets now expect the Fed funds rate to peak around 5.30% from around 4.90% at the beginning of February, while expectations for rate cuts for later this year have been scaled back. The key focus is now on US core PCE data due Friday, which is seen rising 4.3% on-year vs 4.4% previously.

EUR/USD daily chart

On the daily technical charts, the color-coded candles based on trending/momentum indicators suggest that the consolidation within the broader uptrend continues.

On the daily charts, EUR/USD hasn’t yet broken any significant price pivot that would threaten the nearly five-month-long uptrend. In this regard, the January low of 1.0480 is immediate support. A stronger cushion is on the 200-day moving average (now at about 1.0330).

The fall below the February 13 low of 1.0650 has triggered a minor double top (the February 9 and February 14 highs), pointing to a setback toward 1.0480.

EUR/USD four-hour chart