Perhaps the technicals best highlight the significant crossroad that the EURUSD pair has reached. As we discussed here on the monthly chart, EURUSD is testing a significant 20-year + support trendline. It is also testing the trendline that it broke in summer 2020, from the other side.

We turn back to the actual weekly timeframe for this edition of the weekly Fx analysis. Here, the most important event is the appearance of a bullish harmonic bat pattern (see chart below). As you may already know, harmonic patterns are known to either work beautifully or fail miserably.

In the case of EURUSD below, the bat pattern is currently in progress. It has bounced off the harmonic support zone but has not progressed higher toward its 38.2% Fib retracement yet (at 1.1380). Reaching this level is a minimum requirement for the pattern to be deemed successful.

So, if the bat pattern is successful, it means EURUSD will most likely push through the first key resistance at 1.1150 – 1.12. This would be a technical bullish signal and would imply that the major monthly support (1.05 – 1.10 area) is holding.

On the other hand, if the bat pattern fails miserably (i.e., EURUSD breaks the most recent swing low at 1.08), then the odds will significantly increase for the 1.05 – 1.10 monthly support to break too.

So, it seems the technical picture at this juncture can help us to get a much clearer perspective of what’s going on with EURUSD. In the end, this bat pattern may show us the way. One of the two scenarios below appear as a likely outcome of this harmonic bat pattern:

• if EURUSD breaks above 1.1150 - 1.12, then it will likely also reach the 38.2% Fib target of the bat pattern at 1.1380
• If, however, EURUSD breaks below 1.08 (harmonic pattern fails), then buckle up for a potentially fast decline to parity (1.00).

The dollar strengthened modestly last week, though the DXY index mainly remains within the consolidation formation since the top on March 7. More Fed speakers (including Chair Powell) spoke hawkishly in favor of a larger 50bp rate hike, which helped to support the USD last week. However, most of the gains were heavily concentrated against the weak JPY (more on that below in the JPY section), while the dollar still finished weaker versus the commodity-linked currencies of AUD, NZD, and CAD.

The US economic calendar is jam-packed this week, perhaps promising volatile action in the Fx market. The key reports to watch are PCE inflation on Thursday and NFP/jobs on Friday. Inflation and employment are the two main factors affecting Fed policy currently and, therefore, the US dollar. With y/y headline inflation already running near 8%, the focus of Fed officials is clearly on inflation. Hence, if PCE inflation surprises to the upside again, it could prompt more hawkish rhetoric from Fed speakers (this week NY Fed President Williams will speak on three occasions).

On balance, the hawkish Fed, combined with the well-performing US economy in contrast to peers (mainly Europe), should continue to support the US dollar. In particular, Friday’s Nonfarm Payrolls report could act as a catalyst for steeper USD gains if, e.g., it beats estimates (of around 480K) and we get an overall healthy employment report (i.e., strong wage growth and lower unemployment). Other data on the calendar worth watching this week are CB consumer confidence (Tue), Chicago PMI (Thur), and ISM Manufacturing PMI (Fri).

Much as we anticipated in the weekly Fx last Monday, the euro reverted lower and gave up the gains from the week before. Still, the single currency remains quite resilient, given the negative shocks it faces from the war in Ukraine. 

The first reason for the euro holding up well seems to be the hopes that a peace deal between Ukraine and Russia can be reached in the foreseeable future. While this may happen, it’s less likely that sanctions on Russia will be lifted simultaneously (thus, the negative impact on EUR remains).

The second reason for the EUR’s resilience recently is the ECB’s shift away from the ultra-dovish stance in the face of rising inflation. The next Eurozone inflation report will be released this Friday. Both the headline and core CPI are expected to climb (to 6.7% and 3.1%) from last month’s readings of 5.9% and 2.7%. Hence, it’s no wonder that ECB officials are growing more uncomfortable and are not denying market speculation for ECB rate hikes toward year-end. 

However, the war in Ukraine and the EU economic severing ties with Russia via sanctions still mean the outlook for the Eurozone economy is much grimmer than before the war. This crisis will harm Eurozone GDP to a much greater degree than other countries that are not as closely linked with Russia. Lower growth also means that the ECB (despite them trying to sound hawkish) cannot be as hawkish as other central banks whose economies are less impacted. Such central bank policy divergence in principle should lead to a weaker currency (EUR in this case).

Still, it may take some time for the markets to have a full grasp of the implications of the sanctions on Russia and the war in Ukraine and for this to be reflected in the Fx market. So, although the EUR outlook for the coming weeks remains bearish, the currency can continue to consolidate for a while longer or simply take a gradual trajectory lower instead of a sharper leg.