The EUR/USD currency pair continues to pull back from highs near a major resistance zone at 1.1765. Currently, it is trading around 1.1740, losing some ground. Even with this pullback, the two are still set for their best weekly gain since June. This volatility comes in the context of other somewhat contradictory economic signals. Such disaggregated data has already proved powerful by capturing swings in investor sentiment across the Eurozone and United States.
We take a look at how recent U.S. economic reports have had a significant effect on the currency pair. The euphoric U.S. Q3 GDP just got a revision up to a blistering annualized 4.4% growth rate. That’s a full percentage point higher than last quarter’s growth rate of 3.8%. This is a welcome upward revision, due in large part to an unexpected burst of economic (and thus cargo) activity. Despite recent rallies, the U.S. Dollar Index (DXY) is currently trading at three-week lows. No surprise that this drop signals underlying weakness in the dollar’s position.
Economic Indicators and Their Impact
The U.S. economy’s performance appears robust on the surface, yet underlying issues are prompting concerns about the dollar’s status as a global reserve currency. The transatlantic relationship between the United States and the European Union is on a rapid downward spiral. This steep decline calls into question U.S. leadership on the world stage and undermines confidence in the dollar.
Fresh survey data from Germany indicate a better picture for the Eurozone as a whole. Of the incoming economic data, the German Manufacturing Purchasing Managers Index (PMI) surprised markedly to the upside, jumping to 48.7 from 47.0—much stronger than analysts were expecting. On top of that, the improvement in services sector activity was tangible, with the services PMI jumping to 53.3 from 52.7. All of these are positive signs and they are all contributing to a cautious optimism about the euro.
It is important to note that the intraday lows for EUR/USD were recorded at around 1.1725, indicating some volatility within this trading range. This bump and drop demonstrates significant market response to the most recent data points on the economy and continuing global conflict.
Future Projections for EUR/USD
Analysts are widely watching the next target for EUR/USD. They have pegged it at the December 24 high of 1.1808. This level is of key importance for bulls, especially traders, and may indicate more bullish continuation if clearly broken and held above. Whether or not these euro gains will prove lasting could largely hinge on upcoming economic data from either region.
After considering still rising prices, the U.S. PCE Price Index surged 2.8% y-o-y in November. This increase is a sign of inflationary pressures that could influence the Federal Reserve’s monetary policy decisions. These inflation developments are likely to have a double whammy effect on future currency valuations.
All eyes should be on the S&P Global preliminary Services PMI. It is forecast to increase to 52.8 in January, an increase from December’s 52.5. This modest bump is a welcome sign for America’s continued, unabated and often overlooked service sector expansion. It would further stabilize investor confidence in the dollar.
Market Sentiment and Investor Reactions
Investor sentiment is still somewhat mixed as traders absorb this flood of contrasting economic datapoints. There’s not much way around it — the strong GDP growth numbers coming out of the U.S. will have a tendency to make the market more confident in the currency. Geopolitical uncertainties and questions about U.S. global leadership are causing market participants to be cautious.
Bullish euro economic data out of Europe has caused a major shift in EUR/USD trading patterns. At the same time, worries about the U.S. economy are fueling this volatility. As traders continue to balance these concerns, traders are feeling nervous and hopeful about possible moves on both currencies.