The EUR/USD currency pair saw some significant weakness in European trading hours Wednesday, falling to just below 1.1370. The move follows the pair pushing below the key 1.1400 level. This decrease portends nervous trading in the Euro, particularly as new inflation numbers are released from key Eurozone states. Early CPI data from six German Länder and France indicate a sharp drop in inflation. At the same time, Italy and Spain are seeing inflation returning to normal.
Despite this recent pullback, the longer-term outlook for EUR/USD is still quite bullish. This is sending a first upward signal with the 20-week Exponential Moving Average (EMA) crossing higher at 1.0890. With key countries in the Eurozone pointing to a sharp rise in price pressures, traders are on high alert. The second setup to note is the July 2023 high of 1.1276 becoming an important floor for Euro bulls.
Economic Indicators and Market Response
The release of September’s CPI data has traders and investors questioning the health of the Eurozone economy. Indeed, the Eurozone’s largest three economies have already been reporting a cooling of inflation pressures. That shift is driving the Euro’s performance against the US Dollar. Those high hopes became even rosier last Friday when the preliminary Eurozone Q1 Gross Domestic Product (GDP) figures came in well above forecasts. Growth came in at 0.4% q/q, well above economists’ expectations and the prior 0.2%.
The US Dollar Index (DXY) tracks the value of the US Dollar (Greenback) against six other major currencies. As of late, it saw a recent surge, jumping to around 99.35 in light of these events. Commercial traders are already wrestling with what these economic indicators mean for their markets. Many have started taking bets that the European Central Bank (ECB) will cut interest rates by 25 basis points in its next policy meeting in June.
The most traded currency pair on the planet, accounting for approximately 30% of all transactions. Whatever the cause, market participants always pay close attention to its fluctuations. In 2022, the Euro ruled the foreign exchange market, accounting for 31% of all transactions. It could claim record high average daily turnover – since the start of 2019, averaging over $2.2 trillion.
Technical Analysis and Market Sentiment
The 14-week Relative Strength Index (RSI) has spiked to overbought territory above 70.00 on the weekly chart. This is an indication that there is strong bullish momentum in the market. A correction is inevitable, especially if traders decide it’s time to take profits.
1.1500 to retain the psychological resistance level Looking ahead, the psychological resistance level of 1.1500 will be a very important level for market participants to watch. If we see the Euro find strength enough to break back above this level, that could be a sign of re-found confidence in this currency pair. On the flip side, any long-lasting move under the July high at 1.1276 may just send the negative mood even further.
“Euro area business investment by 1.1% in the first year and real GDP growth by around 0.2 percentage points in 2025-26.” – Piero Cipollone
Outlook for the Eurozone Economy
Yet, the broader economic indicators paint a tenuous picture for the Eurozone in the next few months. All positive signs as GDP growth remains strong and inflation remains contained across most areas. Though doing well overall, the economic picture as a whole is still very cloudy. And traders remain jittery as they try to gauge near-term effects from booming geopolitical tensions and an evolving trade landscape.
Recent metro area inflation data and economic performance metrics recently made public shed additional light on this issue. As explained above, market sentiment will play a huge role in determining which direction EUR/USD takes over the near future. Central banks around the world are rapidly shifting their monetary policy as they adapt to new economic realities. Traders need to be on their toes and have the ability to react instantly to any changes.