EUR/USD trades at make-or-break level after Thursday’s sell-off

• EUR/USD has fallen to the 1.0800s, close to a critical level for the short-term trend.
• Further weakness could tip the near-term outlook in favor of bears. 
• Empire State Manufacturing, Michigan Sentiment, US Industrial Production and commentary from ECB’s Nagel round off the week.

EUR/USD is trading in the 1.0800s on the last day of the week after taking a step down from its previous range in the 1.0900s. The catalyst seems to have been Thursday’s US macro data, which dented optimism in the Federal Reserve (Fed) implementing early interest-rate cuts. 

Thursday’s data showed the US Producer Price Index (PPI) unexpectedly rose 1.6% YoY in February after an upwardly-revised 1.0% increase in January, easily beating consensus estimates of 1.1%.

Along with lower-than-expected Initial Jobless Claims and a rise – albeit not as much as predicted – in Retail Sales to 0.6% from a negative, revised-down 1.1% previously, the data suggested the US economy remains hotter than expected. 

It probably means the Fed will have to keep interest rates higher for longer. This  is negative for EUR/USD but positive for the US Dollar (USD) since higher interest rates attract greater inflows of foreign capital. 

EUR/USD: Talking heads at ECB cluster around summer

On Thursday, a long line-up of European Central Bank (ECB) policymakers appeared in public with some of them sharing their views about when the ECB should start cutting interest rates. 

The official line, provided by Christine Lagarde at the press conference following the March ECB meeting, was that the Governing Council would review interest rates in June.

Following the meeting, however, Governor of the Bank of France Francois Villeroy de Galhau stirred up markets by hinting that an interest-rate cut might come as early as April.

His comments suggested that two camps might be forming at the ECB, favoring either a spring or summer rate cut. 

On Wednesday, the Governor of the Bank of Austria and ECB Governing Council member Robert Holzmann joined the June camp. 

Early Thursday ECB Governing Council member Yannis Stournaras seemed to back the case for a spring rate cut, adding that he didn’t buy the argument that the ECB could not cut rates before the Fed, and that four rate cuts in 2024 seemed reasonable.

Also on Thursday, ECB Governing Council member Klaas Knot said he believed the ECB would start cutting interest rates in June.

Vice-President of the ECB Luis de Guindos, speaking in Barcelona on Thursday, said “The ECB should have sufficient information in June to begin making decisions about monetary policy,” according to Bloomberg News. 

On the horizon

Friday’s economic calendar shows no major economic data releases or events that could rock EUR/USD but the US Empire State Manufacturing Index, February Industrial Production figures out of the US and the preliminary Michigan Consumer Sentiment Index may offer traders short-term opportunities.  

For the Euro, Bundesbank President Joachim Nagel is scheduled to give a press conference to present the research project "From the Reichsbank to the Bundesbank" in Frankfurt, Germany. It is possible he may comment on ECB policy at the event. Later on, ECB chief economist and board member Philip Lane will also speak. 

Technical Analysis: EUR/USD reaches critical trend-determination level

EUR/USD continues correcting back, falling into the 1.0800s, after peaking at 1.0981 on March 8. 

After Thursday’s sell-off, the correction is now so deep it brings into question the sustainability of the hitherto dominant short-term uptrend. 

Euro vs US Dollar: 4-hour chart

Bears have now pushed price down to a few pips above the pivotal 1.0867 level of the previous key swing low, highlighted as the make-or-break level for the trend. Should they push price below this level it would start to shift the balance of probabilities in favor of a reversal of the uptrend. 

Such a breakdown would then most probably see a continuation down to 1.0795, at the low of the B leg of the prior ABC Measured Move pattern that unfolded higher during February and early March. 

Alternatively, if the level holds, the short-term uptrend could resume. Confirmation of a higher high and an extension of the uptrend would come from a break above the 1.0981 highs. 

After that, tough resistance is expected at the 1.1000 psychological level, which is likely to be the scene of a fierce battle between bulls and bears. 

A decisive break above 1.1000, however, would open the gates to further gains towards the key resistance level at 1.1139, the December 2023 high. 

By “decisive” it is meant a break characterized by a long green candle piercing clearly above the level and closing near its high, or three green bars in a row, breaching the level.