- US Dollar reacts to positive economic data from the United States.
- EUR/USD extends correction from one-year highs.
- The pair is approaching a short-term uptrend line around 1.0885.
The EUR/USD lost more than 50 pips on Monday, enough to make it the worst day in a month. It bottomed at 1.0908 and rebounded to the 1.0930 area. The pair continues to retreat after hitting one-year highs above 1.1000 on Friday. The key driver was a stronger US Dollar, but the Euro was the worst among majors.
Another positive economic report from the US helped the US Dollar. The Empire Manufacturing Index unexpectedly jumped from -24.6 in March to 10.8 in April, significantly above the -18 of market consensus. On Tuesday, the US reports Building Permits and Housing Starts. The latest round of figures boosted Federal Reserve (Fed) tightening expectations. The odds of one more rate hike at the May 2-3 meeting are at 88%, according to the CME FedWatch Tool. At the same time, the odds of rate cuts by the end of the year diminished.
European and US bond yields rose on Monday. The US 10-year Treasury yield settled at 3.59%, the highest in almost a month and the German 10-year at 2.48%, the highest since March 9. Despite higher Euro Zone yields, the Euro lost ground versus its G10 rivals. European Central Bank (ECB) policymaker, Martins Kazaks, who is considered a hawk, said on Monday that the central bank has the option of a 25 or 50 bps move in May.
On Tuesday, the ZEW Survey is due. The German Current Situation Index is expected to have improved in April to -40 from -46.5 and the Economic Sentiment to 15.1 from 13. In addition, ECB Frank Elderson will deliver a speech.
EUR/USD short-term technical outlook
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The EUR/USD dropped for the second day in a row, extending the correction from the current top to over a hundred pips. Despite the slide, it stayed above the 20-period Simple Moving Average on the daily chart. Although the bullish trend is intact, the Euro needs to regain 1.1000 to overcome the recent bout of weakness.
On the 4-hour chart, technical indicators are biased to the downside, but turning flat, suggesting the likelihood of some consolidation ahead. The correction could extend to the key short-term support area of 1.0885/90. A break below would point to further Euro’s weakness, targeting 1.0850. The initial resistance is located at 1.0950, followed by 1.0970. Above the latter, the EUR/USD should get on track for a test of 1.1000.
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