EUR/USD Daily Forecast – Yesterday’s Rally Signals More Upside

Weak Data Triggers Broad-Based Dollar Weakness

The only major currency that has not gained against the greenback in the early week is the loonie. Yesterday’s manufacturing data came in much weaker than expected, prompting the dollar to sell off.

The ISM Manufacturing PMI came in at 48.1 in November to fall short of the analyst estimate of 49.2. Demand and consumption contracted in November and inputs declined on the back of a contraction in inventories.

The data release ruled out that a rebound is coming in US economic data and sentiment has shifted towards the dollar. At the same time, the US dollar index (DXY), remains within a broader range that has played out for most of the month.

There are a few things that could hinder the rally in EUR/USD, although the technicals are suggesting more upside. First, the futures market aren’t considering the short-coming in manufacturing data as a trigger for more near-term easing. Expectations for another rate cut in the United States in January are barely changed with the market’s pricing in a roughly 10% probability.

More importantly, things are heating up on the trade front. The US government threatened up to 100% tariffs on $2.4 billion of French imports on Monday. The EU responded swiftly and things could escalate from there.

Technical Analysis

The technical picture differs in that yesterday’s upside momentum showed a great deal of strength. Not only did the exchange rate break above a previously broken trendline, it also took out several moving averages.

On a daily chart, the 20 and 50-day moving averages were breached. The pair has also scaled above the 100-day moving averages albeit it trades marginally above it.

In a similar fashion, EUR/USD prices sliced through a major confluence of resistance on a 4-hour chart. On this time frame, the 20, 50, and 100 moving averages had converged near the 1.1030 price point.

EUR/USD also trades above a horizontal level at 1.1072. Recall that this level marked the breakout point from a double top pattern that was formed a month ago.

The upward momentum does seem to be slowing, and the pair is trading in the same area that triggered a turn lower about two weeks ago. Nevertheless, yesterdays’ price action leads me to believe there is more upside and the next area I’m targeting is 1.1129.

Bottom Line

• A momentum-driven rally in EUR/USD opens the pair up for further gains.
• Weak US manufacturing data triggered a weaker dollar that is broad-based against most major currencies.