EUR/USD at risk of further Fed rate cut repricingExchange rate is capped at 1.10Strong support is located at 1.0840

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The Euro to Dollar exchange rate has proven a resilient pair over recent days but looks vulnerable to another repricing in Federal Reserve rate cut expectations, which should clear the way to lower levels.

2024 has seen the market lower odds for a March rate cut at the Federal Reserve, but with a 65% probability still attached to such a move, there remains ample space for a further repricing lower in rate cut odds.

If this is to occur, the Euro-Dollar should resolve the recent range-bound trade by breaking lower.

"Swaps pricing suggest a relatively high — all things considered — degree of conviction that the Fed will cut in March," says Shaun Osborne, Head of FX Research at Scotiabank, "this looks too rich to me."

Regarding the near-term Euro-Dollar outlook, Osborne says, "broader technical signals still suggest a major peak/reversal formed around the EUR's peak above 1.11 around the turn of the year. Risks are tilted towards some further corrective weakness in spot towards the mid/upper 1.07s."

Roberto Mialich, FX Strategist at UniCredit, says Euro-Dollar is locked in the middle of the 1.09-1.10 band, with the pair continuing to show difficulty breaking above 1.10 and reaching the next resistance level between 1.1040 and 1.1050 ahead of the recent peak of 1.1139.

"At the same time, however, the single currency still holds the line above 1.09," he adds.

Tanmay Purohit, a technical analyst at Société Générale, says the Euro-Dollar rate's move higher from October 2023's lows has faced interim resistance near the graphical levels of 1.1100-1.1150, representing highs of April May 2023.

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A sharp pullback has taken shape, but it is worth noting that the pair continues to hold above the 200-day moving average at 1.0840, which forms near-term support.

"If this gets violated, there would be a risk of deeper down move," says Purohit.

He adds that a gradual bounce towards 1.1100-1.1150 can’t be ruled out in the short term. A move above "would be essential to confirm a larger up move towards July 2023 peak near 1.1275."

Image courtesy of Societe Generale.

Euro Week Ahead

The Eurozone's coming week features the release of industrial production figures on Monday, with markets looking for a sobering print of -5.9% y/y for November.

We don't expect a strong market response to the numbers, given Germany's November industrial production data was released just last week.

Germany is in focus Tuesday with the release of the more timely ZEW economic expectations survey results for January, which can impact the market.

The sentiment component is expected to read at 12.7, and the current situation component at -77. Any uptick could underscore evidence that Germany's economy has reached a nadir and form the kind of positive surprise that can boost the Euro.

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Dollar Week Ahead

Wednesday sees the release of U.S. retail sales at 13:30 GMT, which should give an indication as to the strength of the consumer base, a crucial component of the U.S. inflation outlook.

The market looks for retail sales to rise 0.3% m/m in December, with any sizeable surprise likely to support the Dollar.

U.S. industrial production is due for release at 14:15, and the market looks for a print of 0% m/m in December; the market impact of this release is likely to be less pronounced than the retail sales release.

Thursday sees housing starts released at 13:30 GMT, with the market anticipating 1.45M starts m/m in December.

Also out at the same time is U.S. weekly jobless claims, where 207K claims are expected. This release tends to give a view on how the labour market is evolving.

The U.S. labour market has been steadily slowing but nevertheless remains robust and continues to frustrate Dollar bears looking for imminent Federal Reserve rate cuts.

The Dollar can remain supported on another strong print.