KEY POINTS:
- US dollar erased the Christmas week losses
- The Fed is still expected to cut at least twice this year, while the ECB is seen on hold
- EURUSD pulled back to a key support zone around the 1.1670 level
- Eurozone CPI and US NFP in focus this week
FUNDAMENTAL OVERVIEW
USD:
The greenback weakened across the board during the Christmas week but eventually recovered most of the losses. The price action during Christmas holidays is generally just noise, so it’s not surprising that most markets returned to original levels.
In terms of macro, nothing has changed in these two weeks. The latest NFP and CPI reports came both on the softer side and the market is still pricing 63 bps of easing by year-end. The data in December was taken with a pinch of salt given the shutdown related issues, but the next releases will give us a clearer picture.
The market expects the Fed to cut in March at the earliest, so we will need very soft data this month to force them to act sooner. Nonetheless, if the data continues to come in on the softer side, the market will likely increase the total easing for 2026 and that should weigh on the US dollar.
On the other hand, if the data shows strength, traders will likely pare back their rate cut bets and that will likely offer the greenback some support.
EUR:
On the EUR side, the ECB remains in a neutral stance reaffirming its data-dependent and meeting-by-meeting approach to policy decisions. ECB members have repeatedly said that the current policy is appropriate, and they won’t respond to small or short-term deviations from their 2% target. Moreover, they added that the next moves could be either a cut or a hike. The data has been supporting the central bank’s neutral stance.
This week we have the Eurozone CPI data as a key risk event for the single currency. The market might be fine as long as inflation stays below 2.5%, but above this level, traders could start pricing in higher chances of a rate hike coming earlier than expected.
EURUSD TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that EURUSD pulled back into the key support zone around the 1.1670 level. This is where we can expect the buyers to step in with a defined risk below the support to position for a rally into the 1.19 handle next. The sellers, on the other hand, will want to see the price breaking lower to pile in for a drop into the 1.14 handle.
EURUSD TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can see that the price broke below the upward trendline recently and led to deeper pullback. The price now sits at the key support where we can also find the 38.2% Fibonacci retracement level for confluence. This should give the buyers more conviction to step in around these levels with a defined risk below the support to target new highs. The sellers, on the other hand, will look for a break lower to pile in for a drop into new lows.
EURUSD TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we can see that the price is trading at the lower bound of the average daily range for today. This suggests that it’s unlikely that we will see a break to the downside today and the price might either consolidate here or pull back into the minor downward trendline around the 1.1730 level.
If the price gets there, we can expect the sellers to lean on the trendline with a defined risk above it to target a break below the key support. The buyers, on the other hand, will look for a break higher to increase the bullish bets into the 1.19 handle next.
UPCOMING CATALYSTS
Today we get the US ISM Manufacturing PMI. Tomorrow, we get the inflation reports for the major European economies. On Wednesday, we have the Eurozone Flash CPI, the US ADP, the US ISM Services PMI and the US Job Openings data. On Thursday, we get the latest US Jobless Claims figures. On Friday, we conclude the week with the US NFP report.
