2024 begins as a troublesome period for EURUSD. Overly optimistic rate cut bets propelled the EURUSD over 1.10 in the latest days of last year. Now, the market has corrected itself as expected and discussed in the monthly report, returning to its moving averages. The hard time for EURUSD traders will now begin as they contemplate which way to go from the average.
There are some key points that can help in capturing the general outlook of EURUSD for the weeks to come, starting with the longer-term view.
(EURUSD Monthly Chart)
EURUSD has been in a downtrend since the 2008 top, and starting from 2015, the lower lows began to stay higher from the lower line of the trend channel. The price movement appears more stable and contracting, giving the appearance of a possible bullish wedge formation. However, this is a long-term trend, and breaking it would require significant assistance from the economic outlook.
Typically, when the price tops within the trend channel, it comes with many net long positions, similar to the current situation (please refer to the monthly report for further details). The 50- and 100-month moving averages also present strong resistance just below the trendline. Unless the Federal Reserve opts for fast rate cuts in response to a deep enough recession, a breakout seems unlikely, at least for the moment. The crowdedness of bullish positions also creates a risk of a sharp sell-off if the short-term green trend breaks.
(Composite PMI)
Economic activity indicates that the Eurozone economy is in a much worse state than the US, despite having lower rates. Since the second quarter of 2023, the US PMI has remained significantly higher and, most importantly, consistently above 50, signaling growth. The Eurozone has experienced months of PMI below 50, which could be a signal of a possible recession. A recession might prompt faster rate cuts and a weaker Euro.
(10 Year Real Yield Difference)
The real yield difference between Germany and the US is usually a very good indicator for EURUSD, with a high positive correlation. While the EURUSD corrected, the spread lessened in favor of Germany, creating a rare 22-day negative correlation. Hawkish statements from ECB members pointing out summer for the first rate cut, Lagarde’s latest speech about “rate cut optimism hurting ECB’s inflation fight,” and despite the bad economic confidence, an uptrend in ZEW expectations pointing towards recovery helped in closing the real yield spread.
The question remains: After the downward moves, can EURUSD make a small comeback in the short term with the help of this correlation?
(EURUSD Daily Chart)
EURUSD found support from the 200-day moving average and is now moving towards the 50-day moving average. The range of 1.0915-1.0935 will be the resistance to follow. As long as it holds, downward pressures will continue, and the 200-day moving average will be in danger. The baseline scenario is that the resistance holds, overoptimistic rate cut bets normalize further, and with the failure of the 200-day moving average, a run towards the first 50% level of the October-December surge and then towards just above 1.07, where the Fibonacci 61.8% level and the green trend converge.
However, EURUSD bears should closely follow hawkish ECB speak, the Germany-US real yield spread, and US growth and jobs data to avoid being caught off guard with a possible sudden jump.
