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Summary: During the Thursday New York session, the euro rose against the US dollar, reaching levels near 1.0800. The US dollar was on the back foot after US data revealed an increase in weekly initial jobless claims and Challenger Job Cuts, contributing to the euro's upward movement.

Fundamentals

Following France and Spain, industrial production in Germany and Italy also showed signs of weakness at the beginning of the last quarter of this year, indicating a potential recession in the region.

Published data indicated a 0.4% decline in Germany's output in October compared to the previous month, marking the lowest level since August 2020. Italy's output decreased by 0.2% from September. Given the 0.1% contraction in Eurozone GDP in the third quarter, a further three months of contraction would signify an economic recession.

Another survey indicated continued sluggishness in the Eurozone's services and manufacturing sectors. However, Banque de France's Deputy Governor expressed her belief that the most likely scenario would be a genuine global and European economic soft landing.

Moreover, signs of softening economic activity in Germany, rapidly cooling inflation, and fiscal policy tightening suggest the European Central Bank (ECB) will cut interest rates sooner. It is expected that the ECB will make its first interest rate cut in April next year.

Francois Villeroy de Galhau, a member of the ECB's Governing Council, stated that the central bank would not raise rates further. In an interview with the French newspaper La Depeche du Midi, Villeroy said, "Our decisions to increase interest rates are fully playing their role as a remedy against the disease that is inflation."

He added, "This is why, barring any shock, there will be no further increase in our rates - the question of a reduction may arise in 2024, but not now."

Villeroy expressed confidence in the progress made in combating inflation, stating, "We are well on our way in the fight against inflation even if we are not yet finished." He urged patience regarding the duration of these measures and reiterated the ECB's commitment to restoring the inflation rate to 2% by no later than 2025.

Furthermore, he pointed out that the speed of deflation was faster than expected, citing two reasons: the slowdown in energy prices unaffected by the Middle East conflict and the deceleration of other prices (services and products manufactured) due to monetary policy.

Although the ECB may push back against market pricing at the December meeting, we believe the pushback will not fundamentally challenge the current market pricing.

The market had previously anticipated the ECB's first rate cut in June next year. Refinitiv data indicates that the current market expectation for ECB rate cuts in 2024 totals 141 basis points, including a cumulative 39 basis points by April.

Technical Analysis

The EURUSD attracted some buyers near 1.0700, marking the lowest level since November 14th earlier today and seemingly putting an end to six consecutive days of decline. The US dollar weakened as initial jobless claims came in lower than market expectations. However, during the early New York session, the asset traded narrowly around the 1.0775-1.0800 range, lacking bullish confidence.

Momentum indicators suggest a prevailing downside bias as the price retreats from the short-term peak at 1.1016. A sustained breach below the 55-day SMA (currently at 1.0770) would pave the way for a retest of the support level at 1.0447.

On the upside, surpassing the key resistance at 1.0804 would initially tilt the price towards neutrality. However, as long as the resistance at 1.1016 holds, the risk remains tilted to the downside.

Overall, the weakness of the EURUSD pair, after six consecutive trading days of decline, shows signs of potential stabilization today. However, as long as the 1.1016 resistance remains intact, the trend remains bearish. Buying on dips is recommended as the primary trading strategy.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.0760

Target Price: 1.0918

Stop Loss: 1.0650

Valid Until: 2023-12-21 23:55:00

Support: 1.0755, 1.0704, 1.0656

Resistance: 1.0804, 1.0854, 1.0895