EURUSD set for “golden cross” despite pullback

The world’s most-traded FX pair has already seen plenty of action at the onset of the new year.

Yesterday (Tuesday, January 2nd) – the first trading day of 2024 - EURUSD fell by 0.93%.

EURUSD posted its biggest single-day drop since late July 2023 as it plummeted below the psychologically-important 1.10 level, amid a broader US dollar advance.

The US dollar’s recovery at the onset of 2024 came as markets pared bets for Fed rate cuts this year.

NOTE: The prospects of interest rates moving lower in an economy tends to weaken its currency.

Furthermore, EURUSD had been ripe for a technical pullback.

Its 14-day relative strength index (RSI) had flirted with the 70 line that marks “overbought” conditions at the tail-end of 2023.

At the time of writing, this FX pair is testing immediate support at its 21-day simple moving average (SMA).

Key events this week

Still, traders will be alert to these key fundamental events on the economic calendar due in the days ahead:

1) Wednesday, January 3rd: FOMC meeting minutes

Recall that, at their final scheduled policy meeting of 2023, the Fed forecasted several rate cuts in this new year, which led to a US dollar slump at the tail-end of 2023.

The US dollar could revert to its weakening bias, and prompt EURUSD to unwind recent losses, should the incoming meeting minutes reveal that the Fed is indeed intent on lowering its benchmark rates this year.

However, if the FOMC meeting minutes show that markets have been too eager in anticipating just how much lower, and how soon, the Fed will loosen its policy settings, that could prompt further declines in EURUSD.

Note also that Richmond Fed President, Tom Barkin – who will be a voter on the FOMC this year – is also due a speech later today. Barkin’s comments will be scoured for additional clues about the Fed’s plans for US interest rates in 2024.

2) Thursday, January 4th: Germany CPI

Here are the economists’ forecasts for the headline inflation data out of the Eurozone’s largest economy, as measured by the consumer price index (CPI):

• CPI month-on-month (December 2023 vs. November 2023): 0.2%
  This would be a notable uptick from the November’s minus 0.4%  m/m figure.
   
• CPI year-on-year (December 2023 vs. December 2022): 3.7%
  This would be a notable rise from the November’s 3.2% y/y growth.

Lower-than-expected CPI figures out of Germany may restore hopes for rate cuts by the European Central Bank (ECB) in 2024, with a 60% chance being given for the first rate cut to occur as soon as March 2024.

Such expectations may lead to more weakening for the euro.

Note also that Germany’s CPI precedes the broader Eurozone’s CPI, which is due the day after (Friday, January 5th).

Hence, markets tend to front-load their perceptions on the ECB’s policy outlook based on Germany’s CPI, before learning of the broader Eurozone’s CPI a day later.

3) Friday, January 5th: US jobs report

Here are the forecasts by economists for this ever-pivotal US nonfarm payrolls (NFP), usually released on the first Friday of every month:

• Total jobs added (headline NFP number): 170,000
  If so, that would be lower than the 199,000 jobs added in the prior month (November 2023)
   
• Unemployment rate: 3.8%
  If so, this would be a tick higher than November’s 3.7%.
   
• Average hourly earnings month-on-month (December 2023 vs. November 2023): 0.3%
  If so, this would be slightly lower than November’s 0.4% m/m number.
   
• Average hourly earnings year-on-year (December 2023 vs. December 2022): 3.9%
  If so, this would be slightly lower than November’s 4.0% y/y number.

The headline NFP and unemployment numbers may well be used to decipher the likelihood of a “soft landing” (no recession) for the US economy.

Arguably, markets will be paying greater attention to the average hourly earnings figures.

Lower-than-expected growth for average hourly earnings, which further dilutes inflationary pressures, may revive bets for Fed rate cuts in 2024.

That should in turn limit the US dollar’s recovery while helping EURUSD recover.

Technical analysis: EURUSD on cusp of forming “golden cross”

EURUSD’s 50-day SMA is on a path towards crossing above its 200-day counterpart.

Such a technical event is often seen as a sign that EURUSD could climb even higher over the near-term.

The last time we saw a "golden cross"  for EURUSD was in late-2022, before this FX pair went on to claim a 3.12% annual gain for 2023.

As long as markets can hold on to hopes that the Fed can press ahead with its intended rate cuts in 2024, that should extend EURUSD’s upside – a scenario that would likely be confirmed with a “golden cross”.

If the above-listed events play into the hands of euro bulls (those betting that the euro will get stronger), that could even see EURUSD being restored above the psychological 1.10 mark once more this week.