It is time for an update of the monthly EURUSD chart. A key development in April is the effectual bearish breakout of the 20-year support trendline (see chart below). In simple terms, this bearish breakout was confirmed with the very weak close (tall red candle) and the break of the 2020 Covid low around 1.06. Technically, this is a clear bearish signal and implies that EURUSD’s destination is toward the next important support area, which is parity (1.00).

Moreover, it is important to note that the 1.00 level is not a major support area, but a rather modest one (based on monthly chart perspective). The more important support areas are located below 0.95 and toward the 0.90 area. That’s some 1500 pips below current levels. If such a move transpires, it will be history in the making for EURUSD.

To the upside, monthly resistance is found at the 1.10 area. This technical zone should now hold and reject any potential bullish attempts – should they happen – to keep the bearish breakout intact. Remember, this is a monthly chart, so tests of the 1.10 area and above can happen, but the monthly close is what matters. If EURUSD stays below 1.10 in the coming months, the technicals on this chart will remain bearish.

The opening week of a new month usually comes with a busy economic calendar, and this one is no different. The main highlights in the US are the Fed meeting on Wednesday and the Nonfarm Payrolls report on Friday. The other reports that markets will focus on are the ISM manufacturing PMI (now released at 55.4 vs 57.5 estimate) and the ISM services PMI (due Wed).

The main attention will be on the Fed. They are expected to raise rates by 50bp and announce the start of QT. This is almost fully priced into the market, so the scope for surprises is mainly in the forward guidance and press conference with Chairman Powell. If there are surprises, they are likely to be on the hawkish side (e.g., a larger 75bp hike). Thus, the risks for a USD correction seem small, despite the overbought conditions on some technical indicators due to its sharp rise in recent weeks.

The longer-term trend, which is the divergence between the hawkish Fed and other central banks that are either less hawkish or outright dovish (e.g., BOJ), will likely keep the dollar strong during this and in the coming weeks. Aside from the hawkish Fed supporting it, another reason for the strong dollar is the weakness in other currencies (more about this in the sections below).

On Friday, the NFP report is expected to show 400K jobs were created in April, while the unemployment rate is forecasted at 3.5%. If the actual numbers are anything close to this or stronger, they can only provide further support for the dollar as this will be fully in line with the very hawkish Fed.

The big news last week on the Russia-West front was that Russia had halted gas flows to Poland and Bulgaria after the two EU countries failed to make payment in roubles. This news added to the already bearish sentiment on the EUR currency and pushed its downtrend to new cycle lows.

The European energy crisis remains in focus this week as the EU should announce a new (6th) package of sanctions against Russia. Rumors suggest this could include a complete ban on oil and gas imports. If this is the case, gas and oil prices may push higher again, while the EUR currency will likely go the other way.

Economic data last week provided more evidence of the stagflationary environment in Europe (high inflation, low growth). CPI inflation came in at a record 7.5%, while the core CPI also increased to a record 3.5%, further highlighting the unpleasant situation the ECB currently finds itself in. They have to hike rates and stop quantitative easing because inflation is getting uncomfortably hot, while at the same time, this will additionally hurt the already weakening economy. 

Given this backdrop, little can offer support to the euro, and the downtrend is likely to stay intact. Another factor contributing to the bearish EUR sentiment is China and the slowing economy there due to new harsh Covid lockdowns. China is the largest trading partner of the EU, so any economic weakness there is quickly felt in Europe as well.

The EUR calendar is rather light this week, with only 2nd-tier reports, with the highlights being retail sales and some German factory orders and industrial production data.