On Wednesday, EUR/USD hovered just below the 1.0700 mark following weaker-than-expected private sector growth in the U.S. and a dip in American business activity. These developments challenged the notion of U.S. economic exceptionalism and exerted downward pressure on the U.S. Dollar (USD).
The pair received a modest boost after the release of positive German economic sentiment data from the IFO survey for April. Notably, the Business Climate and Current Assessment components exceeded expectations, while Expectations aligned with forecasts.
EUR/USD’s upward momentum gained traction amidst a backdrop of subdued U.S. data, with the Services and Manufacturing PMI indexes experiencing declines in April. This unexpected downturn suggested a less robust economic performance in the U.S., especially under the weight of relatively high interest rates.
Persistent strength in the services sector in both Europe and the U.S. has delayed expectations for interest rate cuts by both the Federal Reserve (Fed) and the European Central Bank (ECB). While ECB officials appear inclined towards a rate cut in June, Fed officials have remained ambiguous about their timeline for potential rate adjustments.
The contrasting stances of the Fed and ECB regarding interest rates have been a primary driver behind the recent outperformance of the USD and the bearish momentum of EUR/USD.
Despite expectations of ECB rate cuts, doubts emerged following higher-than-expected preliminary Services PMI data in the Eurozone, casting uncertainty on the ECB’s June decision. ECB governing council member Joachim Nagel highlighted concerns about persistent services inflation and its impact on overall inflation, refraining from a definitive commitment to rate adjustments.
Attention now turns to ECB commentary and U.S. Durable Goods data, which will provide further insights into the respective economies.
Technical analysis reveals a break in EUR/USD’s short-term downtrend, with the pair piercing above the crucial 1.0700 level. This challenges previous assumptions of a Bear Flag pattern formation, potentially signaling a reversal. Resistance levels at 1.0758 and further resistance from the 50-day and 200-day Simple Moving Averages (SMA) at 1.0807 are key targets for bullish movement.
However, a breach below the April 16 low of 1.0601 would validate the Bear Flag hypothesis, with downside targets set at 1.0503 and 1.0446, corresponding to Fibonacci ratios and historical lows.
