EUR/USD forecast: signal as the euro outlook darkens

By:
on Apr 2, 2024
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  • The EUR/USD pair continued plunging this week.
  • The US published strong manufacturing PMI data.
  • The European manufacturing sector is still in contraction mode.

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The euro is under intense pressure as concerns about the European economy continue. The EUR/USD plunge accelerated on Tuesday as the pair retreated to its lowest level since February 15th of this year.

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ECB and Fed potential divergence

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The EUR to USD exchange rate crashed hard as economic data from the US and Europe pointed to a potential divergence between the Federal Reserve and the European Central Bank (ECB).

Data by the Institute of Supply Management (ISM) revealed that manufacturing activity in the US improved in March. The figure rose to 52, crossing the expansion zone of 50 for the first time since 2022.

That number sends a signal that the US is doing well since the manufacturing sector has historically lagged behind the services industry. 

At the same time, the US economy is going through full employment, with the unemployment rate sitting below 5%. Retail sales, consumer confidence, and factory orders are all crawling back after slipping a few months ago.

All this is happening at a time when US inflation has remained much higher than the Fed’s target of 2.0%. Core inflation is almost double this target point. Therefore, the bond market shows that the Federal Reserve may delay its rate-cut cycle.

The opposite is happening in Europe. Data by S&P Global shows that the manufacturing PMI remained at 46.1 in March, meaning that it is contracting. In a note, a S&P Global economist said:

“It is therefore to be expected that the industry is on the verge of surpassing the longest contraction spell for incoming new orders in the survey history, which was 25 months during the euro crisis in 2011 to 2013. This does not speak for a quick turnaround in activity.”

Most companies in the European Union are struggling from low demand and liquidity as interest rates have remained at an elevated level. 

There are signs that the bloc’s inflation has continued falling this year. Economists expect the German inflation retreated from 2.5% in February to 2.2% in March. They also expect that the European inflation fell to 2.5% and core CPI retreated to 3.0% in March.

That is a sign that the bloc’s inflation is nearing the ECB target of 2.0%. Therefore, there is a likelihood that the European Central Bank (ECB) will start cutting rates earlier than the Fed.

The next important EUR/USD news will be the upcoming statements by officials like Mary Daly, Loretta Mester, John Williams, and Michele Bowman. Jerome Powell, the Fed Chair, will talk on Wednesday.

EUR/USD forecast

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EUR/USD

EUR/USD chart by TradingView

The EUR/USD pair has been in a strong bearish trend in the past few weeks. This retreat happened after the pair peaked at 1.0978 in March. On the daily chart, the pair has slipped below the lower side of the pitchfork tool. 

The exchange rate has tumbled below the 50-day and 25-day moving averages. The two averages have made a bearish crossover pattern. Also, the Klinger oscillator and the Money Flow Index (MFI) have all pointed downwards.

Therefore, the outlook for the pair is extremely bearish, with the next level to watch being at 1.0690, its lowest point on Valentine’s Day. A drop below that level will see it tumble to the key support at 1.0600.

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