EURUSD not out of the woods despite a bullish breakout from trend line resistance

01 Nov 2022

After a persistent downtrend since the start of 2021, which saw the EURUSD slide from the high of 1.2348 to a low of 0.9536 on 28 September, the currency pair had displayed signs of bullish reversal with a breakout above a descending trend line resistance that had capped the pair since February this year. Despite the bullish breakout, the EURUSD is still not out of the woods yet as it struggles to establish support above parity level at 1.00.

The US Dollar Index, which gauges the strength of the US dollar against a basket of rival currencies, is currently hovering around 111.

Eurozone reports record inflation of 10.7%

On Monday, Eurostat released the Eurozone Harmonised Index of Consumer Prices (HICP) for the month of October and the report surprised the market with a reading of 10.7% that is higher than the previous month data of 9.9% and consensus of 10.2%. The HICP is a significant way to measure changes in the purchasing trends and inflation in the Euro Zone. A higher reading would typically be bullish for the pair as market anticipate the European Central Bank (ECB) to be more hawkish in order to tame inflation.

Dismal Chinese data and persistent Covid-19 lockdowns worry investors

Over in Asia, the Chinese economy continues to send worrying signals with the latest NBS Manufacturing PMI and Non-Manufacturing PMI reporting at 49.2 and 48.7 respectively. The NBS Manufacturing PMI is considered a leading indicator that highlights the health of the manufacturing sector which serves as the backbone of the Chinese economy. Any data below 50 is considered contractionary. As China is a global economic powerhouse, the data, which reflects its economic health has high influence on financial markets worldwide.

On the other hand, the rising Covid-19 cases in China also prompted temporary lockdowns on millions of people. The persistent zero-Covid policy continues to exert pressure on the already contractionary Chinese economy.

Downbeat outlook on the global economy may provide tailwinds for the greenback as risk aversion boosts demand for the safe haven currency.

Technical Analysis

Despite the EURUSD breaking above the descending trend line resistance on 24 October, prices have also formed a rising wedge that may suggest a diminishing bullish momentum. At the time of analysis on 1 November, EURUSD rebounded slightly from the lower support line of the rising wedge. This move is also in tandem with a rebound in Relative Strength Index (RSI) upon hitting 50.

Looking ahead, prices may rebound further to test the parity level (S1) and the upper resistance of the rising wedge around 1.014. As long as prices remain within the rising wedge, the bias remains bearish for the EURUSD pair and we expect prices to retest the support levels at 0.986 (S1) and 0.97 (S2).

Tuesday, November 1

USD – S&P Global Manufacturing PMI(Oct), ISM Manufacturing Employment Index(Oct), ISM Manufacturing New Orders Index(Oct), ISM Manufacturing PMI(Oct), ISM Manufacturing Prices Paid(Oct).

Wednesday, November 2

EUR – German Trade Balance s.a.(Sep), Spain S&P Global Manufacturing PMI(Oct), German S&P Global/BME Manufacturing PMI(Oct), German Unemployment Rate s.a.(Oct)

USD – ADP Employment Change(Oct)

Thursday, November 3

USD – Fed Interest Rate Decision, Fed’s Monetary Policy Statement, FOMC Press Conference, Goods and Services Trade Balance(Sep), Initial Jobless Claims(Oct 28), Nonfarm Productivity(Q3), Unit Labor Costs(Q3), S&P Global Composite PMI(Oct), Factory Orders (MoM)(Sep), ISM Services Employment Index(Oct), ISM Services PMI(Oct)

EUR – ECB’s President Lagarde speech, ECB’s Panetta speech, ECB’s Elderson speech, Unemployment Rate(Sep)

Friday, November 4

EUR – German Factory Orders s.a. (MoM)(Sep), ECB’s De Guindos speech, S&P Global Composite PMI(Oct), ECB’s President Lagarde speech

USD – Average Hourly Earnings (MoM)(YoY)(Oct), Labor Force Participation Rate(Oct), Nonfarm Payrolls(Oct), U6 Underemployment Rate(Oct), Unemployment Rate(Oct)

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