Unveiling the Forces Behind Euro’s Descent Against the Dollar

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It seems that the downward path for the EUR/USD is prevailing in the next stage for several reasons, the most prominent of which are:

  • The strength of the US dollar and most US economic data exceeding analysts’ expectations.

  • Reducing market bets on US interest rate cuts, as the possibility of a one-time interest rate cut or even no cut this year is currently being priced after it was priced about seven times at the beginning of this year.

  • The hawkish statements of the Chairman and most members of the Fed, hinting that interest rates will remain high for a longer period and that there is no need to rush to reduce interest rates.

  • Dovish statements by the President and most members of the European Central Bank, hinting that they will start cutting interest rates this summer or in June of this year.

  • The headline consumer price index slowed on an annual basis in the euro zone, recording 2.4% in March, which is close to the target rate of 2% by the European Central Bank. This encourages the European Central Bank to start reducing European interest rates this year while the headline consumer price index on annual basis in the United States of America is still very stubborn, recording 3.5% in March.

The continued difference between German and US government bond yields is putting pressure on the euro against the dollar. For example, the two-year German government bond yield is approximately 3.00%. As for the two-year US Treasury bond yield, it is approximately 5.00%, so the gap is approximately 2%, and this encourages interest trading or carry trade.

This week, analysts are closely awaiting the release of the GDP and core personal consumption expenditures indices in the United States of America, and therefore caution must be exercised, as any reading that is higher than expectations for these two indicators indicates a high possibility that it will have a negative impact on the euro/dollar pair.

The euro against the dollar is hovering around the 1.06 levels, and the technical picture seems discouraging. For example: the positive movement index (DMI+) records approximately 15 points, compared to the negative movement index (DMI-), which records approximately 30 points. We note that the gap is rather large between these two indicators, which means that the selling pressures on the EUR/USD are strong. More importantly, the ADX trend strength index is recording around 25 points, which means that the momentum of this downward trend is strong.

If the pivot point of 1.0649 is broken for the euro against the dollar, there is a possibility that it will target the support levels 1.0627, 1.0600, and 1.0578. If it exceeds the pivot point, it is likely to target the resistance levels 1.0675, 1.0698, and 1.0724.

Please note that this analysis is provided for informational purposes only and should not be considered as investment advice.

 

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