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EUR/USD Revisits Lows on Euro Area Inflation, US Jobs

EUR/USD fell on Wednesday, giving back its modest gains from the previous day and closely approaching the new seven-month low of 1.0557 that was established on Monday.

This drop occurred after a lower-than-expected inflation estimate for the euro area was released on Wednesday morning. The headline Consumer Price Index (CPI) estimate for November came out at 0.1% against prior expectations of 0.2%. This weak inflation reading helps to reinforce already-strong expectations that the European Central Bank (ECB) will potentially be announcing further easing measures in its widely-anticipated press conference slated for Thursday. Such an announcement would very likely place significant additional pressure on the besieged euro.

Also contributing to Wednesday’s EUR/USD slide was a substantially better-than-expected employment report for the US private sector that was released by the payroll services company, ADP. Though this report is not nearly as closely-watched as the Non-Farm Payrolls (NFP) report that is scheduled for Friday, it often provides a glimpse at what might be expected for the official NFP data. The ADP number came out at 217,000 jobs added, considerably higher than prior expectations of 191,000. A positive US employment picture helps to reinforce broad expectations that the Federal Reserve will institute an interest rate hike in its mid-December meeting. In turn, anticipation of an impending rate hike and monetary tightening cycle helps to support the US dollar, as it has for the past several months, thereby exerting additional pressure on the EUR/USD currency pair.

This combination of expected ECB easing and Fed tightening has been the main driver of EUR/USD’s severe slide for the past month-and-a-half since mid-October. During the course of this slide, the currency pair has followed a sharply-angled downtrend line and has broken down below major support levels, including 1.1100 and 1.0800. In mid-November, the 50-day moving average crossed below the 200-day moving average for the first time since June of 2014, creating an ominous “death cross” technical signal that hints at further potential losses.

The next major downside target for the currency pair remains at the key 1.0500 level, which is around where a temporary bottom was formed earlier this year. With any further downside pressure below 1.0500 prompted by the noted monetary policy divergence, the next major price objectives are at 1.0200 support, followed by parity (1.0000).

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