Since July 18, when it hit a new yearly high near 1.1275, the EUR/USD has been steadily falling. Yesterday’s effort to break through the psychological 1.1000 barrier was met with strong selling pressure, and the pair ultimately settled closer to the 1.0900 level on the back of a stronger US dollar. With the final PMI statistics from the Euro Area due this morning, the Dollar has gotten off to a strong start, as shown by the currency strength chart below.
Fitch Ratings downgraded the United States, which has led to a general risk-off mood and has been especially helpful for the dollar recently. Still, the dollar’s rise is unexpected in light of the downgrade, and it follows a general pattern for 2023 in which predictions based on theoretical scenarios have not always come true. It’s worth noting, though, that the DXY experienced a strong rise in the months after a downgrading by S&P in 2011. Will we see a rerun of the past or not?
EURO AREA PMI DATA
This morning’s statistics from the Euro Area is a mixed bag. The decline in business activity witnessed in manufacturing PMI data was mirrored in the Services PMI, which came in below expectations. The Composite Purchasing Managers’ Index (PMI) for HCOB, compiled by S&P Global and widely regarded as an indicator of economic health, fell to 48.6 in December, the lowest level in 8 months. The composite input-output price index fell to 53.1 from 53.8, marking its lowest level since early 2021. This was one of the few bright spots in today’s statistics. Policymakers at the European Central Bank (ECB) will likely heave a sigh of relief on the inflation front, since the ECB had a challenging time navigating future rate hikes in the face of a slowing economy.
RISK EVENTS AHEAD
Due out later today from the United States are reports on ISM Services and Initial Jobless Claims, both of which could have an effect on the EURUSD. The US dollar gained strength as the ADP job change data released yesterday crushed estimates, sending EURUSD down. If the ISM Services index and the number of initial jobless claims released later today meet expectations, it could put downward pressure on EURUSD.
Technical analysis of EUR/USD suggests that a pullback towards the 1.1000 psychological level is forming. At the present time, the 50-day moving average (MA) and the 100-day MA (MA) are providing dynamic support at 1.09300 and 1.09150, respectively, for the price.
It may be difficult to break through the 1.0975 handle, which represents immediate resistance just below the psychological 1.1000 barrier. The bullish trend is still in effect as the 1.0840 swing low has not been broken. Changing structure with a daily candle close below the 1.0840 handle could signal the start of a new downtrend if the price breaks below the existing level of support.
EURJPY OUTLOOK AND BOJ POLICY
The BoJ’s unexpected declaration last week that it would be adjusting its Yield Curve Control policy makes the EURJPY a fascinating pair to watch. Although this boosted the Yen at first, its strength has since waned, as evidenced by yesterday’s retest of the YTD high in EURJPY.
As the cloud of FX intervention persists around the Yen, a break higher and new YTD highs are possible but may prove to be temporary. The BoJ has often stated that they will take action only in the event of excessive moves, but I would take this with a grain of salt. Could we witness a similar tale involving FX intervention, given that the BoJ has repeatedly stated they see no need to change the YCC policy before springing a surprise?
Though the overall structure and price action suggest a new leg to the downside, the fundamental concerns have largely overtaken the technical forecast. As can be seen in the accompanying chart, the BoJ’s adjustment to the YCC policy aided the current down move, which displayed a double to pattern.
