Euro Likely to Remain Under Pressure as 1.05 Handle Looms

Key Points:

• Euro likely to continue sliding towards the 1.05 handle.

• RSI Still trending lower within neutral territory.

• Watch for a gradual slide to oversold status before we are likely to see a retracement.

The Euro continued to retreat throughout most of last week, as price action was rejected from levels around the 55EMA, despite a stronger than expected EU Retail Sales Result of 0.7% m/m. Much of the move was due to the stronger greenback sentiment in the wake of a sharp fall in the U.S. Unemployment Rate to 4.5%. However, the pair is nearing some key support around the 1.05 handle which could prove to be decisive in the coming week. Subsequently, let’s take a look at last week’s machinations as we attempt to provide some forward guidance.

Last week continued the ongoing depreciation of the Euro as the pair saw the impact of a relatively sharp sentiment swing towards the U.S. Dollar. Subsequently, the market largely ignored the robust EU Retail Sales result of 0.7% m/m and instead focused on the tightening U.S. labour market figures. In particular, a surprise fall in the unemployment rate to 4.5% is indicative of the ongoing tightening within the market as the economy effectively abuts the natural rate of unemployment. Subsequently, this is fuelling rising speculation of near term rate hikes as we view the forward outlook for the Fed. This sentiment swing continued to push the Euro lower and the pair subsequently ended the week around the 1.0589 mark.

Looking ahead, the pair is likely to focus sharply on Fed Chair Yellen’s pending speech as well as the U.S. Core CPI numbers. As the U.S. Labour market continues to firm, so too does the focus upon further rate hikes from the central bank. In particular, the market will be reviewing the CPI figures with a view to second guessing the Fed’s direction in the coming months. In contrast, the EU has little in the way of fundamental data to contribute to the week ahead with the primary event likely to be the ZEW Economic Sentiment result. However, there will be little in the way of volatility from the Eurocentric data and the market’s focus will remains firmly on the greenback side of the pair.

From a technical perspective, the Euro’s ongoing fall has taken it towards a key support level at 1.0494 which breaching would send it sharply lower.  This development argues that the corrective phase is not yet over, however, the RSI Oscillator is now nearing oversold levels which suggests that a period of moderation is the likely move in the week ahead. Subsequently, our initial bias for the coming week is neutral but with the caveat to watch for a gradual slide back towards the key 1.05 handle. Support is currently in place for the pair at 1.0572, 1.0495, and 1.0364. Resistance exists on the upside at 1.0677, 1.0783, and 1.0828.

Ultimately, there is little upside momentum to suggest that the Euro is likely to turn around any time soon. The medium term view still suggests a pullback towards the 1.05 handle, before the daily RSI becomes oversold, and we see any chance of a sharp retracement away from further declines. Subsequently, the pair is likely to provide little in the way of respite for the bulls in the short term but keep a close watch on it as markets open on the other side of the Easter holidays.