Has the euro run out of steam against the dollar?

The euro remains strong against the dollar despite a few notches lower this week. It is up 1.67% on the month in June, and up 6.82% year-to-date. But this shouldn’t be taken as a cue to plough into the common currency. Instead, it may be time to change position.

The euro rose again on Thursday after the US reported a modest increase in jobless claims and is treading water Friday ahead of the closely watched monthly job market report for June. Jobless data showed that although job openings fell to a two-year low in May, they remained above their pre-pandemic levels with 1.6 jobs available for every person.

With the labour market remaining strong the Fed will keep on facing inflationary pressures and is expected to raise rates again in July, after the pause in June.

Taking a slightly longer time horizon, the ECB will likely have to deal with weaker economic growth for longer than the Federal Reserve. Overall, US economic numbers are convincingly stronger than those in the Eurozone. Germany’s economy, which dictates the pace of European growth, is weaker still, particularly in manufacturing, making it unlikely for the Eurozone economy to turn around quickly.

Germany is on course for a rare three-quarter long recession. Its industrial production dropped 0.2% month-on-month in May, partially reflecting its dependence on Chinese buying of German goods, particularly cars and machinery. This has dipped in the last few months as China undergoes its own slowdown after the initial burst of high activity at the start of the year.

Investors are awake to all of this and their short positions in euro/dollar are beginning to outnumber their longs.

US, Eurozone and German economic indicators at a glance:

While the data in the table speak for itself it is worth noting that although Eurozone inflation has dropped in June to 5.5%, its lowest level since January last year, and producer prices declined by 1.5% in May, contracting for the first time in over two years, the core indicators remained persistently elevated. They are stubbornly above the ECB’s target of 2% and are expected to remain there throughout 2024 and 2025. ECB President Christine Lagarde said that the ECB will “not stand idly by” if both profits and wages rise, confirming what traders already expect in terms of the ECB’s intentions to increase rates.

Economic calendar

In the short term, the euro may notch higher but, barring any negative macroeconomic or geopolitical news, it is unlikely to successfully challenge the $1.0900 level. The next support level is at $1.0866. Given the fact that investors are increasingly positioning on the short side of this trade, the more likely range for the euro going forward would be between $1.075 and $1.080.

Next week brings the release of the Euro area ZEW economic sentiment on Tuesday and industrial production numbers on Thursday, with inflation data due on 19 July. US inflation data is due on 12 July, retail sales numbers and industrial production data on 18 July.

Related USD / Euro Currency Pairs – ETFs