Main Highlights
- The EUR/USD pair has fallen below the significant 1.1500 level, continuing a depreciating trend influenced by hawkish sentiment from the Federal Reserve and a cautious market mood.
- US economic data, such as the ISM Manufacturing PMI, indicated a contraction in manufacturing activity, yet the US Dollar remained resilient.
- Divergent views among Federal Reserve policymakers regarding the future path of interest rates are contributing to market uncertainty.
- Upcoming events include ECB President Lagarde’s speech and key US labor market data, with markets closely monitoring these for directional cues.
- Technical analysis suggests further downside potential for EUR/USD, with key support levels identified at 1.1440 and 1.1390.
The EUR/USD exchange rate has broken below the critical 1.1500 psychological level, following a brief recovery attempt that faltered at 1.1530. The pair has experienced a depreciation of approximately 1.5% over the past five trading days, primarily driven by the US Dollar’s strength, bolstered by hawkish signals from the Federal Reserve and a general sense of risk aversion in the market.
Despite weaker-than-expected manufacturing activity data in the United States for October, the US Dollar maintained its upward momentum. The ISM Manufacturing Purchasing Managers’ Index (PMI) reported a contraction for the eighth consecutive month due to declining new orders and subdued employment levels, indicating ongoing challenges in the sector.
Federal Reserve’s Cautious Stance
Federal Reserve policymakers have expressed a range of opinions on the future direction of monetary policy. While some, like San Francisco Fed President Mary Daly and Chicago Fed President Austan Golsbee, have indicated a cautious approach given inflationary pressures, Governor Stephen Miran suggested that current monetary policy is overly restrictive and could warrant further rate cuts.
Futures markets reflect this uncertainty, with the probability of a December rate cut by the Federal Reserve decreasing significantly from previous expectations, contributing to the stability of US Treasury yields and the US Dollar.
Eurozone Economic Outlook
In the Eurozone, preliminary figures for the HCOB Manufacturing PMI indicated a stabilization in the sector’s activity, reaching 50.0, a slight improvement from September’s 49.8 reading. However, this level suggests that the manufacturing sector is at a standstill rather than experiencing growth.
Looking ahead, markets will be paying close attention to a speech by European Central Bank (ECB) President Christine Lagarde for any new insights into monetary policy. In the United States, the ongoing government shutdown is expected to cause the cancellation of important data releases, such as the September JOLTS Job Openings and Factory Orders. Investors will instead focus on the ADP Employment Change report for October, due on Wednesday, for insights into the labor market’s health.
EUR/USD Technical Analysis
The EUR/USD pair has failed to sustain gains above the 1.1530 resistance level, leading to a renewed decline below 1.1500. The 4-hour Relative Strength Index (RSI) indicator is approaching oversold territory, which may provide some temporary support and limit further downward movement in the immediate term.
Despite the potential for stabilization, the recent price action reinforces a broader bearish sentiment for the pair. If EUR/USD closes below 1.1500, the next significant support level is projected to be around the 261.8% Fibonacci retracement of the late October rally, near 1.1450. This level is also part of a broken triangle pattern target. Further down, the 1.1390 level, representing August highs, could be tested, though this appears less likely in the current trading session.
On the upside, a sustained move back above the 1.1500 level would be necessary to alleviate bearish pressure. This could shift the focus to the session’s high at 1.1530 and the prior support area around 1.1545. A break above these levels could then target the October 22 and 23 lows at 1.1580.
Understanding Market Sentiment Dynamics
💡 The terms risk-on and risk-off describe investor willingness to take on risk. In risk-on markets, optimism prevails, leading to investments in riskier assets. Conversely, risk-off periods are characterized by investor caution, with a preference for safer assets due to future economic concerns.
📊 Key assets to monitor for risk sentiment include stock markets, commodities (excluding gold during risk-off), and currencies. During risk-on periods, stocks and most commodities tend to rise, along with commodity-linked currencies. In risk-off scenarios, safe-haven assets like government bonds, gold, the Japanese Yen, Swiss Franc, and US Dollar typically see increased demand.
⚡ Currencies that tend to strengthen during risk-on sentiment include the Australian Dollar (AUD), Canadian Dollar (CAD), and New Zealand Dollar (NZD). Their economies are often export-driven, benefiting from increased demand for commodities during periods of global economic growth.
📍 Conversely, the US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) are considered safe-haven currencies that typically appreciate during risk-off periods. The USD’s status as the global reserve currency, demand for Japanese government bonds, and the protective nature of Swiss banking laws contribute to their appeal in times of market stress.
Expert Summary
The EUR/USD pair is experiencing downward pressure, breaking below key technical levels amid a strong US Dollar and cautious global market sentiment. While US economic data reveals manufacturing weakness, Federal Reserve policy remains a significant influencing factor.
Technically, the pair faces resistance at higher levels and finds support at 1.1440, indicating potential for further declines unless a decisive move above 1.1500 occurs.