The EUR/USD pair rose above the 1.06000 level, fueled by a boost in risk appetite weighing heavily on the US dollar. The greenback was also impacted by a surge in US equities, which closed with weekly gains.
Additionally, data from the US indicated that the services sector continued to grow steadily in February. In addition to the services data, employment data soared unexpectedly, indicating a potential rebound in the labor market.
This news is positive and may support the dollar in the coming weeks. However, as we move into the next week, all eyes will be on the Non-Farm Payroll (NFP) data, which will provide insight into the current state of the US labor market.
Technical Analysis of EUR/USD
Since early February, the pair have been exchanging hands above the descending regression channel. The 20 SMA and 50 SMA convergence have reinforced resistance levels at 1.0620. If the pair stabilizes at this level, it could trigger a run to 1.0650 and, subsequently, 1.0700 and 1.0720 at the 38.2% Fibonacci retracement level.
However, if the pair re-enters the descending channel, the bears could have a field day, causing the pair to slide to the 1.0560 psychological level. It could be followed by a drop to the 1.0540 level, further declining to the 1.0500 level.
Fundamental Analysis of EUR/USD
Despite a brief rebound to 1.0600 on Friday, the pair experienced a turnaround earlier in the week and lost all its gains for the day. This price action suggests that the market is still being determined as investors await further guidance from the Fed.
However, the market’s initial reaction to stronger-than-expected data from the Eurozone and the Fed’s hawkish stance has continued to support the currency. Pierre Wunsch from the ECB has suggested that a 4% terminal rate can be excluded as inflation in the Eurozone remains high.
Research from Danske Bank and Morgan Stanley forecasts that the ECB should raise the terminal to 4%. Vice-President Luis de Guindos’ upcoming speech is important as his previous remarks opened the door to a 50 bp rate hike.
If the policymaker delivers similar news, the Euro will likely continue outperforming its rivals. Therefore, market participants closely monitoring the risk perception during the American trading session is important.
Earlier this week, the manufacturing PMI from China contributed to a return of risk flows, making it difficult for the dollar to gain strength. In Asia, the Caixin services PMI came in above analysts’ predictions in China, showing that business in the region is expanding rapidly.
Additionally, the US stock futures gained between 0.5% and 0.8%. If Wall Street rallies after the bell opening on Monday, the pair could potentially extend its rebound.
Over the past week, it has become evident that inflation rates are rising, and central banks worldwide will need to take action. In addition, the economic data we have received this week show a weakening economy and could force central banks to ease the rate hikes to avoid plunging the economy into a deep recession later in 2023.
Furthermore, economic data indicates that many economies are lagging, and consumer confidence is decreasing. While this may be detrimental to the global economy, it is a positive development for the Euro and other currencies, as it boosts their value.