The EUR/USD pair is currently positioned around 1.1540, showing an upward trend following a rebound from 1.1490 on Friday. The recovery came after a week characterized by significant fluctuations in global assets and a resurgence of optimism regarding a potential 25-basis-point rate cut by the Federal Reserve in December. The likelihood of this move has increased to 69%, compared to 44% just a week ago, as U.S. yields have softened and the Dollar Index has retreated to 100.15 from the highs observed last week. The impetus originated from the dovish remarks made by New York Fed President John Williams, who indicated that policymakers possess “room to adjust” monetary policy in the near term without compromising the inflation target. His remarks reversed part of the prior week’s dollar strength, which was triggered by tighter rhetoric from officials such as Boston Fed President Susan Collins and Dallas Fed President Lorie Logan, both of whom cautioned against premature easing.
Even with a more positive outlook on policy, the macroeconomic data in the U.S. continues to show inconsistencies. The University of Michigan Consumer Sentiment Index saw an increase to 51 in November, up from 50.3, while inflation expectations for the upcoming year decreased to 4.5% from 4.7%. The five-year outlook has decreased to 3.4%, reflecting a slight disinflationary sentiment. Meanwhile, the S&P Global Services PMI increased to 55.0, exceeding expectations of 54.8, while the Manufacturing PMI decreased to 51.9 from 52.5. The recent releases indicate that the U.S. economy remains above recessionary thresholds, yet is slowing down sufficiently to warrant a degree of policy flexibility. The interplay has limited dollar appreciation and allowed the euro to maintain stability above the 1.15 level. The euro has managed to recover, even in the face of weak European fundamentals. The German IFO Business Climate Index decreased to 88.1 in November, down from 88.4, falling short of consensus forecasts which anticipated a figure of 88.5.
The economic outlook has declined to 90.6, a decrease from 91.6, indicating ongoing pessimism within the business sector. The Eurozone HCOB Manufacturing PMI decreased to 49.7 from 50.0, falling short of the anticipated rise to 50.2, indicating a return to contraction in the industrial sector. The Services PMI increased marginally to 53.1 from 53.0, while the Composite Index decreased to 52.4, indicating a gradual pace of expansion. In Germany, manufacturing activity has decreased to 48.4, and services have significantly declined to 52.7 from 54.6, which is notably lower than the anticipated 53.9. The data indicates that the largest economy in the Eurozone continues to exhibit fragility, even with some signs of mild stabilization observed in southern Europe. The European Central Bank maintains a stance of policy patience, indicating no immediate shift towards cuts. President Christine Lagarde highlighted the importance of remaining vigilant regarding inflation and affirmed that no adjustments to rates are anticipated until late 2025. ECB members continue to uphold the deposit rate at 4%, presenting a stark contrast to the Fed’s possible inclination towards easing. The recent divergence has led to a temporary narrowing of rate differentials that favor the euro, enabling EUR/USD to maintain its support range between 1.147 and 1.150. Nonetheless, the resilience of the single currency appears to be more a response to U.S. weakness than a reflection of inherent strength within the Eurozone. From a technical standpoint, EUR/USD continues to experience short-term bearish pressure, even with recent stabilization observed.
The pair is currently positioned beneath the 20-day and 50-day exponential moving averages (1.1553 and 1.1600), indicating a constrained formation. A sustained break above 1.1539 is necessary to mitigate the prevailing downside bias. The Relative Strength Index has bounced back from oversold conditions yet continues to stay under 40, suggesting that the rally does not possess strong momentum. On the four-hour chart, momentum indicators indicate a corrective bounce rather than a trend reversal. Key resistance zones are concentrated between 1.1539 and 1.1600, with the subsequent pivot located at 1.1625, where the descending channel from October converges. Should these barriers remain unbroken, we may see a resurgence of selling pressure targeting 1.1490, followed by 1.1468, and potentially 1.1425 if U.S. data comes in stronger than expected. The U.S. Dollar Index, currently at 100.14, has pulled back from the five-day rally observed last week. Although the overarching trend continues to be positive above 99.70, there is a noticeable decline in momentum. The RSI on the daily chart has decreased from 65 to 58, indicating that buyers are facing challenges in surpassing the 100.34 resistance level. As liquidity diminishes toward month-end and U.S. Treasury yields stabilize around 4.05%, traders are reducing their long-dollar positions in anticipation of Tuesday’s PPI report. A weaker print may hasten the dollar’s downturn, propelling EUR/USD deeper into mid-range resistance areas. On Monday, European equity markets experienced an improvement in risk sentiment, bolstered by reports suggesting a revival in Ukraine peace negotiations and a stabilization in global growth expectations. The DAX and CAC 40 experienced an increase exceeding 1.2%, leading to a shift towards risk-on sentiment in the euro.
However, experts caution that this rebound is tenuous due to the Eurozone’s unfavorable manufacturing outlook and subdued consumer demand. The correlation between EUR/USD and equities has recently intensified, showing a positive coefficient of 0.71. This suggests that the pair’s short-term recovery is influenced more by risk appetite than by interest rate differentials. Attention is now focused on the upcoming U.S. Producer Price Index and Retail Sales reports scheduled for Tuesday. Market expectations indicate that headline PPI is projected to increase by 0.3% month-on-month, while retail sales are anticipated to grow by 0.4%. Any deviation could lead to significant fluctuations in EUR/USD, particularly considering the market’s heavily crowded short positioning. An elevated inflation report may reignite demand for the dollar, potentially bringing the pair down beneath 1.15. Conversely, weaker data could bolster expectations for a December rate cut, possibly steering the pair towards 1.1600. Options markets indicate that one-week implied volatility has risen to 7.8%, an increase from 6.4% observed last week, signaling heightened hedging demand in response to data risk. Speculative traders continue to hold a net short position on the euro, as indicated by CFTC data reflecting –78,000 contracts as of last Tuesday. Nevertheless, there has been an increase in short-covering activity as the dollar rally comes to a halt. The behavior of the spot price near 1.1500 is characterized by long-wick candles, indicating a presence of dip-buying interest in that area. This dynamic reflects previous cyclical lows, but a sustained recovery will necessitate a clear return to the 1.156–1.160 range to activate trend-following investments. Until that occurs, EUR/USD remains technically confined within a corrective range, with the risk tilted towards the downside should the Fed narrative change once more.