The euro declined yesterday amid a sharp increase in demand for the US dollar and is currently trading near 1.1197. The pair was trading around 1.1270 yesterday morning but has since fallen below the lows recorded in recent days.
The reason is that US economic data exceeded expectations, while European data disappointed. Initial jobless claims, which measure the number of people filing for unemployment benefits for the first time, came in at 189,000 versus the forecast of 197,000. The lower this figure, the stronger the labor market. Labor productivity, which measures how much output workers produce per hour, accelerated to 3.6% in the third quarter, compared with the forecast of 2.8%.
The situation in Europe was the opposite. German industrial orders increased by 4.4%, below the expected 4.8%, while industrial production in France declined by 0.5%, despite analysts forecasting growth. The market favored the dollar.
Beth Hammack of the Federal Reserve, the US central bank, added to market confidence in the dollar. She stated that monetary policy would need to become restrictive to bring inflation back to 2% and that she would prefer more frequent but smaller interest rate adjustments. This is not new information. Similar comments on October 12 had already pushed the euro to monthly lows, while Hammack voted in favor of an interest rate increase on October 28. Her stance has not changed, but the market reaction is telling. Investors are once again seriously pricing in a December Fed rate hike, and these expectations are supporting the dollar.
The euro has little to counter this pressure. The European economy is slowing, while inflation remains high, at around 4.0%. The ECB continues to signal that the final rate increase will take place in December, bringing the rate to 2.75%, but it has provided no new hawkish signals. Such signals could have helped offset the dollar's strength.
Today, the euro faces another round of European economic data, which offers little reason for buyers to be optimistic. German industrial production for September is forecast to decline by 0.2% following a strong August, when it increased by 2.0%. This expected pullback will nevertheless highlight the weakness of the industrial sector. Retail sales in the eurozone are also expected to decline slightly, while their annual growth rate is forecast to slow. This indicates weaker consumer spending, as more money is being spent on expensive energy.
Momentum
The price is currently below both key levels. The breakout level for an upward move is 1.1211, just 14 points above the current price, while the breakout level for a downward move is 1.1177, 20 points below.
The 1.1211 level is important for an upward move. If the euro consolidates firmly above it, the next targets will be 1.1244 and then 1.1272. Such a move is possible if the US economic report disappoints, but there is insufficient reason to anticipate it before the data are released.
For a downward move, attention is focused on 1.1177. A downward breakout would open the way toward 1.1138 and 1.1108. This is considered the primary scenario. European economic data remain weak, the Federal Reserve is supporting the dollar, and the euro has no new catalyst for appreciation.
Mean Reversion
The upper reference level is 1.1218, while the lower level is 1.1180. The upper level is just 7 points above the breakout level of 1.1211, meaning that price could reach it quickly following an upward breakout. If the price touches 1.1218 and then moves back down, this would indicate a reversal rather than a continuation of the upward movement.
The lower level of 1.1180 is only 3 points above 1.1177. Because these levels are so close, it is impossible to distinguish a genuine breakout from a false breakout based on the first test alone. Such sharp price movements are common following labor market reports. Therefore, it is better to wait for the initial market reaction to subside and observe subsequent price action.
