Week Ahead: Say bye to EURUSD’s March gains?

Even as markets brace for the highly-anticipated US jobs report due later today (Friday, March 10th), the prudent investor/trader will already be keeping an eye on what’s to come:
 

Sunday, March 12

• US daylight savings time ends

Tuesday, March 14

• AUD: Australia February business confidence; March consumer confidence
• GBP: UK January unemployment rate, February jobless claims
• USD: US February consumer price index (CPI)

Wednesday, March 15

• CNH: China February industrial production, retail sales, jobless rate
• JPY: Bank of Japan meeting minutes
• EUR: Eurozone January industrial production
• GBP: UK Chancellor presents Spring Budget
• USD: US February retail sales

Thursday, March 16

• NZD: New Zealand 4Q GDP
• AUD: Australia February unemployment, March inflation expectations
• EUR: ECB rate decision
• USD: US weekly jobless claims

Friday, March 17

• EUR: Eurozone February CPI (final)
• USD: US February industrial production, March consumer sentiment

 

Here are 3 reasons why we’re especially focusing on EURUSD for the coming week:

 

1) US inflation still stubborn?

The incoming CPI (consumer price index – which measures headline inflation) is set to be the next major risk event (after today’s NFP release) for the US dollar, and by extension, the rest of the FX universe.

This is also arguably the most important datapoint that the US central bank a.k.a. the Fed will take into account ahead of its upcoming policy meeting on 21-22 March.

The February CPI number due Tuesday is forecasted to come in at 6%, which would be:

• lower than January’s 6.4%
• but still three times higher than the Fed’s inflation target of 2%

A significantly higher-than-6% CPI number implies that the Fed has to send US interest rates much higher to quell still-stubborn inflation. Such an outlook should strengthen the US Dollar which in turn would drag EURUSD lower.

On the other hand, a lower-than-6% CPI suggests that the Fed does not have to be as aggressive as markets fear, which would offer much relief to markets and potentially send EURUSD higher.

 

2) ECB rate hike

A 50-basis point hike by the European Central Bank (ECB) is all but certain at its Thursday meeting.

Less known is how high the ECB has to ultimately send its benchmark rate to subdue its own inflationary pressures, noting that the Eurozone’s February core CPI (released on March 2nd) came in at a higher-than-expected 5.6% - a new record high!

As things stand, markets forecasting that the ECB’s deposit rate will peak at 4% by the end of 2023, from the current 2.5% ahead of next week’s decision.

That implies a further 150-bps in rate hikes (including next week’s 50-bps hike).

 And recall that, generally, the central bank that has more rate hikes in store (relative to the central bank’s peers) tends to see its currency strengthen.

Hence, markets will be more sensitive to what the ECB says about its plans for future adjustments to its benchmark rates:

• If the ECB suggests strongly that another 50-bps hike is in store at its early-May rate decision, that should send the EURUSD higher either towards or above its 50-day simple moving average (SMA), depending on where EURUSD ends up after today’s US jobs report.
   
• However, if the ECB strikes a more dovish tone and opens the door for a downshift towards a relatively smaller 25-bps hike for upcoming meetings, that could weigh on EURUSD and potentially drag it below its 100-day SMA and into sub-1.05 domain, depending on where this FX pair ends up by the weekend.

 

 

3) EURUSD’s 1-week implied volatility at year-to-date high

The EURUSD’s forecasted volatility over the next one-week period for has reached its highest levels so far in 2023.

The above chart lays bare just how sensitive the world’s most popularly traded FX pair is to the incoming US CPI print and also the ECB decision.

 

At the time of writing (and before the pivotal US jobs report due later today), Bloomberg’s FX model forecasts a 71% chance that EURUSD will trade within the 1.0411 – 1.0775 range over the upcoming week.

Although EURUSD has been in a downtrend since early February, printing a series of lower lows on the price charts, next week’s events would have major sway over EURUSD’s immediate fate.

Ultimately, EURUSD’s slim month-to-date gain of just 0.1% (at the time of writing) will either evaporate, or be added to, by the upcoming week’s events.

 

Key levels for EURUSD

RESISTANCE

• 1.060 region: around 38.2% Fibonacci level from January 2021 – October 2022 drop
   
• 21-day SMA
   
• 1.069 region: resisted EURUSD bulls on several episodes since mid-December 2023
   
• 50-day SMA

 

SUPPORT

• 100-day SMA
   
• 1.050 psychologically-important level
   
• 1.04832 cycle low in January 2023
   
• 1.04433 low on December 7th

 

EURUSD Euro US Dollar European Central Bank inflation rate hikes Federal Reserve FED Volatility