Euro-Dollar Exchange Rate Suffers Setback but Tipped to Stabilise

- EUR/USD forecast to stabilise following sharp fall

- Strong U.S. data pushes EUR/USD lower

- Dollar back in charge on global FX markets

- Spot Euro-to-Dollar exchange rate today: 1.1145, down 0.07%

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Volatility in the Euro-to-Dollar exchange rate has spiked over the past 24 hours after the Dollar rose sharply in response to some better-than-forecast U.S. data, and in the process drove the EUR/USD down half a percent.

Meanwhile, news of an Iranian retaliation against the U.S. in the Middle East - a U.S. base in Iraq has been attacked - has been met with little by way of reaction in the foreign exchange markets and confirms, that for currencies at least, data still remains king.

The EUR/USD exchange rate fell half a percent to 1.1135, from a daily high of 1.1197, after it was reported the U.S. ISM non-manufacturing index rose 1.1 point to 55.0 in December, this being better than the 54.5 expected by the market.

"This is better than we expected; it appears that firms have responded immediately, and positively, to the news that the Phase One trade deal would prevent the imposition of further tariffs on consumer goods," says Ian Shepherdson, Chief Economist at Pantheon Macroeconomics.

"This report should calm fears of weakness in the ISM manufacturing index spilling into the service sector," says Sarah House, Senior Economist at Wells Fargo Securities, "current conditions rebounded in December as the largest gain came from the business activity sub-index, up 5.6 points. That serves as the latest indication that activity in the service sector continues to hold up as manufacturing activity has floundered."

While the data might have been a driver behind the move, a graph for the Euro-Dollar exchange rate shows the pair to have been in decline through the day and the fall appears to be part of a short-term trend that clearly favours the Dollar:

Concerning the outlook, Karen Jones, Head of FICC Technical Analysis at Commerzbank, says the Euro is likely to remain well supported, despite the recent setback.

"EUR/USD sold off yesterday, there is scope to extend its decline to the 55 day moving average at 1.1065, but we should see some stabilisation around there," says Jones in a note released to clients midweek. "Overhead the market is facing tough resistance at 1.1197-1.1240 – namely the 55 week moving average, the 2019-2020 down channel and the recent high and it is probable that it just needs further consolidation."

"Dips lower are well supported by the 55 and 20 day moving average at 1.1095/1.1065 and the 3 month uptrend at 1.1047," says Jones.

While the Dollar found some support from data, it must be noted that data out of the Eurozone continues to point to stabilisation after a soft 2019. Expectations of a recovery in economic growth could well see the Euro better supported in 2020, and this expectation might explain the EUR/USD exchange rate's ongoing recovery from October 2019 lows.

The Euro outlook improved Tuesday after Eurostat data showed inflation hitting a nine-month high in December and consumers opening their wallets in the shops in November, adding to other recent signs that the continental economy is stabilising in the wake of an 18-month retrenchment.

Eurozone inflation rose from 1% to 1.3% in December, its highest level since April 2019, due to gains in commodity prices while core inflation remained unchanged at a post-crisis high of 1.3% last month. Core inflation removes commodity-linked food and energy items from the goods basket so is seen by central bankers and markets alike as the more reliable gauge of domestically generated inflation trends.

Separately retail sales were reported to have risen by 1% in November while the 0.6% contraction initially declared for October was revised to -0.3% in what was another win for the Euro and apparently stabilising continental economy. There had been concerns last year that the the downturn in the manufacturing sector would spread into services and the domestic side of the economy.

"On the one hand, 1.3% core is higher than it has been for a quite some time and momentum is building gradually. But, on the other hand, core inflation is likely to be lower already next month and activity indicators are probably more important until the risks of a deeper downturn have diminished," says Anders Svendsen, an economist at Nordea Markets. "In sum, today’s numbers are likely to keep the ECB in a wait-and-see mode."

The Euro steadied briefly against the Dollar in the wake of the report.

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