The EUR/USD currency pair is facing significant headwinds, pressured by a confluence of factors including weak economic data from the Eurozone and China, and a strong US dollar. Just as the market absorbed concerning Eurozone figures and ongoing Chinese economic anxieties, news reports suggesting a potential national economic emergency declaration by Donald Trump to implement new tariffs further exacerbated the Euro’s decline against the dollar. This week, the dollar’s strength will be tested by key US economic data releases, most notably the non-farm payrolls report. As we approach these critical data points, the EUR/USD forecast remains decidedly bearish.
Eurozone and China Economic Woes Deepen
The EUR/USD pair is under siege from multiple fronts. The persistent weakness in the Eurozone and Chinese economies continues to exert downward pressure on the euro. Conversely, the US dollar is drawing strength from increasing US Treasury bond yields and positive economic data. Focusing on the euro’s vulnerabilities, recent data reveals a concerning downturn. German factory orders experienced their most significant drop in three months, while French consumer confidence unexpectedly waned.
Specifically, German factory orders plummeted by 5.4% month-on-month, starkly contrasting with the anticipated 0.3% decrease. Retail sales in Germany also contracted, falling by 0.6% month-on-month against expectations of a 0.5% rise.
Adding to the euro’s challenges is the dimming economic outlook for China. This has triggered a surge in demand for Chinese bonds, leading to a decrease in their yields and a weakening of the yuan. A weaker yuan diminishes the purchasing power of the world’s second-largest economy, a concerning development given China’s role as a major export market for Eurozone goods, particularly in the luxury sector.
Market sentiment towards China is increasingly pessimistic, pushing bond yields to historic lows amid growing fears of a deflationary spiral in its economy. Currently, 10-year Chinese bonds offer a yield a full 3 percentage points lower than comparable US Treasury bonds. These yield differentials are more pronounced than during the pandemic and even the 2008 global financial crisis, highlighting the severity of concerns surrounding the Chinese economy.
Tariff Talk Undermines Euro’s Position
The latest resurgence of tariff discussions is further bolstering the dollar’s appeal. This comes after a brief dollar sell-off earlier in the week, which was prompted by reports suggesting a potential softening stance on tariffs from Donald Trump’s advisors. While Trump mentioned anticipating a positive relationship with China’s Xi Jinping, he swiftly denied any shift towards a more lenient tariff policy. Given his consistently hawkish rhetoric on trade, a significant change in his approach upon taking office later this month appears unlikely. With tariffs once again dominating headlines, the dollar’s movements are expected to be increasingly influenced by these developments, necessitating heightened risk management strategies for traders.
US Economic Data Remains Robust
While Europe grapples with economic challenges, the US economy continues to demonstrate resilience. Both the ISM Services PMI and JOLTS job openings data released yesterday surpassed expectations, underscoring the robust economic momentum within the world’s largest economy. JOLTS job openings climbed to 8.098 million in November, exceeding both the forecast of 7.730 million and the previous month’s figure of 7.839 million. This represents the highest level of job openings since June 2024, signaling ongoing strength in the US labor market. Furthermore, the crucial services sector exhibited accelerated growth, with the ISM Services PMI rising to 54.1, above the anticipated 53.5 and up from 52.1 the previous month.
Today’s ADP payrolls data is unlikely to be a major market mover, leaving the focus primarily on rising bond yields and tariff-related news. The market’s attention will then pivot to Friday’s official jobs report. Yesterday’s auction of 10-year Treasury notes resulted in the highest yield since 2007, with investors now contemplating 5% yields as a potential benchmark. Concurrently, swap market traders have adjusted their expectations for the first Federal Reserve interest rate cut this year, pushing it back to July from June. A substantial shift in incoming economic data would be required to bring those rate cut expectations forward once more.
EUR/USD Technical Analysis Points to Further Weakness
Source: TradingView.com
The EUR/USD pair remains firmly entrenched in a bearish trajectory. This is evidenced by a descending trend line connecting recent highs, as well as both the 21-day and 200-day moving averages trending downwards and positioned above the current market price. Crucially, key support levels continue to be breached. Unless the pair can reclaim resistance within the 1.0460-1.0500 range, the path of least resistance remains to the downside. Immediate bearish targets include liquidity below last week’s low at 1.0224, followed by the psychological 1.0200 level, and potentially extending towards the parity level of 1.00 EUR USD.
— Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
Trading EUR/USD with City Index
To trade the EUR/USD pair with City Index, follow these straightforward steps:
- Open a City Index account, or log in if you’re an existing client.
- Locate the EUR/USD pair on the City Index platform.
- Define your trade parameters, including position size, stop-loss, and limit levels.
- Execute your EUR/USD trade.
