Chapter 15 04/27 EURUSD: Broader Medium-Term Uptrend to Remain Intact If Key Support Holds
Summary: Strong inflation and spending data in the report seems to have boosted the U.S. dollar despite weak U.S. GDP growth in the first quarter. EURUSD came under bearish pressure again on Thursday and fell below the 1.1000 handle in the New York session. From a technical perspective, the overall trend remains upward.
Fundamentals
The preliminary estimate released by the U.S. Bureau of Economic Analysis (BEA) on Thursday shows that the U.S. economy will grow at an annualized rate of 1.1% in the first quarter of 2023. This figure is the first time that it is below market expectations of 2% growth after the 2.6% growth recorded in the last quarter of 2022.
Total details of the report show that the Consumer Price Index (CPI) edged up to 4% from 3.9% over the same period, compared to market expectations of 3.8%. On a quarterly basis, the Personal Consumption Expenditures Price Index (PCE) rose from 3.7% to 4.2%.
The increase in real GDP reflects increases in consumer spending, exports, federal government spending, state and local government spending, and nonresidential fixed investment, which were partially offset by declines in private inventory investment and residential fixed investment.
In terms of the market, private consumption, which accounts for two-thirds of GDP, still grew by 3.7% in the first quarter. Households benefited from continued strength in the labor market, as well as special effects such as increased social security and income tax cuts.
Disposable income grew by a robust 12.5% in the first quarter. Housing construction is showing signs of stabilization with a relatively modest 4.2% decline after seven quarters of steep declines, with the sector largely adapting to higher mortgage rates.
Meanwhile, stronger GDP growth is being hampered by much less business inventory replenishment than before. This effectively lowered GDP growth by 2.3 percentage points, and the effect should not be repeated in the second quarter.
The U.S. economy is still holding up quite well in early 2023 but is expected to contract slightly in the second half of the year, due to the usual lag. The full impact of the Fed's rate hike will likely not be felt until then. Growth in the first quarter was largely based on very good data in January and has weakened in February and March.
Although the GDP data was disappointing, the U.S. dollar index gained traction after a mixed subconscious response and climbed to 101.70. The stronger-than-expected growth in the inflation component of GDP, which may have allowed the Fed to delay a policy shift, appears to be helping the U.S. dollar find demand. In addition, indicators based on many surveys, such as the ISM Purchasing Managers' Index, appear worse than the actual situation, as inventory data tends to be volatile.
Technical Analysis
After hitting 2023 high of 1.1095 on Wednesday, the EURUSD is again under bearish pressure; nevertheless, the overall trend remains upward as bullish technical studies help boost the near-term outlook.
From a daily timeframe perspective, the pair holds well above the bullish moving averages, with the 20-day SMA providing dynamic support for the bulls around 1.0955. The longer-term moving averages continue to turn upward below it, while technical indicators are well above their mid-lines.
Nevertheless, risks are skewed to the downside within the 4-hour timeframe. The pair is currently crossing the mildly bullish 20 SMA, while the longer-term moving averages are losing upside momentum below the current level. On the other hand, technical indicators are steadily moving lower, the momentum indicator is at negative levels and the RSI is currently challenging the 50 level. Still, the likelihood of continued declines is very limited as the pair is forming a bullish triangle pattern with rising lows.
On Wednesday, prices broke above the previous highs to point the way to further gains later. At the same time, the triangle pattern's breakout can occur in either direction, but given that the dominant trend is bullish, prices will go higher.
At the time of writing, EURUSD hit a new 2023 high of 1.1095 and has fallen back to the 1.1000 neutral range. As long as the 1.0830 low is held, the broader medium-term uptrend will remain intact. In terms of trading strategy, buying the dips is recommended.
Trading Recommendations
Trading Direction: Long
Entry Price: 1.1000
Target Price: 1.2250
Stop Loss: 1.0700
Valid Until: 2022-05-11 23:55:00
Support: 1.1000, 1.0964, 1.0950, 1.0909
Resistance: 1.1075, 1.1095, 1.1184, 1.1223
