Euro to Dollar Weakness Deepens Amid USD Comeback: Oversold Indicators Emerge
Original Article by James Skinner, PoundSterlingLive.com
The euro continued to decline against the US dollar during the week, as the greenback regained strength across global markets. Signs of technical overselling have surfaced on various indicators, suggesting that the EUR/USD may be approaching a corrective rebound. However, bearish forces currently dominate the trend, creating a cautious outlook for the single currency.
Strategists point to multiple factors driving the euro’s extended weakness—ranging from changing interest rate expectations to macroeconomic divergences between the Eurozone and the United States. As the dollar rallies broadly, the EUR/USD pair has been dragged lower, slipping below significant technical thresholds.
Key Market Highlights:
– The EUR/USD exchange rate breached the 1.07 handle and continued to fall throughout the week.
– Technical indicators suggest the currency pair is entering oversold territory, raising potential for a short-term correction.
– Rate differentials between the Federal Reserve and the European Central Bank (ECB) continue to widen, favoring the dollar.
– Recent US data has been strong, bolstering expectations that the Fed will maintain higher interest rates for longer.
Technical Overview: Signs of Oversold Conditions on Charts
Despite the persistent bearish pressure, technical analysis suggests that the euro may experience a brief rally if oversold signals trigger a buying response from traders and institutions.
According to Neil Jones, Head of FX Sales at Mizuho Bank, traders are taking note as key relative strength indexes (RSI) dip into oversold territory, suggesting potential for a bounce. He emphasized that while short positions on the euro are prevalent, a short squeeze could create temporary upward momentum.
Key technical elements to watch:
– Daily Relative Strength Index (RSI) has fallen below 30, typically a signal the pair is oversold.
– Momentum remains tilted to the downside, but the EUR/USD pair is approaching historical support zones.
– Previous price levels around 1.0620 and 1.0600 are now in focus as potential short-term support.
– Traders are monitoring for a close above 1.0720 to signal a potential short-term reversal.
While the dollar remains resilient, many analysts caution that technical exhaustion could lead to modest retracement, especially if upcoming US data underwhelms or fails to reinforce the Federal Reserve’s hawkish stance.
Monetary Policy Divergence Fuels Euro Weakness
The core narrative underpinning euro depreciation is reinforced by growing divergence between monetary policy in the US and the Eurozone. The Federal Reserve has signaled its preparedness to keep interest rates elevated, citing strong economic data and persistent inflation pressures. Meanwhile, the ECB is seen as nearing the end of its tightening cycle.
Investor expectations are adjusting accordingly:
– US economic data, including job figures and inflation readings, continue to support a higher-for-longer interest rate regime from the Fed.
– Markets are pricing in another delay in rate cuts from the Federal Reserve, pushing back any dovish pivot into late 2024 or early 2025.
– Data from the Eurozone reflects stagnation or contraction in key sectors, with inflation trending slower than in the US.
– The ECB has opened the door to potential rate cuts as early as mid-2024 if disinflation trends remain on track.
This divergence shifts investor capital toward dollar-denominated assets, as the yield advantage decisively favors the US.
Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, underlines the impact of US economic exceptionalism. He argues that the US economy continues to attract inflows due to robust growth, higher rates, and financial resilience, creating sustained demand for dollars.
Impact of Economic Data on EUR/USD Direction
Weekly releases of influential economic indicators have amplified market volatility and reshaped forecasts.
Key recent developments include:
– Strong US nonfarm payrolls and services PMI data exceeded expectations, solidifying the case for prolonged Fed hawkish
Read more on EUR/USD trading.