Image Source: Unsplash
 

Following Tuesday’s drop, the EUR/USD was trying to find its feet again as investors looked ahead to the release of key US data this week. The FX markets kicked off September with a punchy dollar rally on the first full trading day for US investors, leaving plenty of traders scratching their heads. Much of the move seemed tied to the sell-off in long-dated bonds across the globe. But let’s be clear: this doesn’t change the bigger picture. The dollar’s strength looks a touch overdone and could well fade in the coming days as markets refocus on the data and the Fed. Thus, I still expect to see a bullish breakout above 1.1700 resistance.
     

ECB unlikely to cut rates despite French troubles

The EUR/USD currency pair has been held back in recent days in part because of French political risk and the resulting underperformance of the OATs (French Treasury bonds).  That said, it looks like much of that drag is already priced in, and the bar for another rate cut by the ECB is set high. The eurozone’s trade agreement with the US could have been far worse. What’s more, we have seen a bit of improvement in forward-looking sentiment indicators from Germany and a few other Eurozone countries. And let’s not forget that inflation has been somewhat hotter than expected.

Indeed, the core CPI inflation reading came in hotter yesterday although that didn’t immediately lift the euro. It came in unchanged at 2.3% y/y versus 2.2% expected. But this morning, the single currency was rebounding again, perhaps in delayed reaction as yesterday it was all about the dollar and bond markets. What’s more, Eurozone PPI also came out slightly stronger this morning at +0.4% m/m vs. +0.2% eyed. However, the final estimates for the PMIs data were revised slightly lower, with German services for example falling below the 50.0 level at 49.3 compared to 50.1 reported initially. This kept the euro’s gains in check.

All told, I think EUR/USD has room to claw back some of yesterday’s losses, with a push back above 1.17 looking achievable, especially if US data disappoints later this week and not to mention the fact that the ECB seems in no rush to move on interest rates again.
 

Key US data in focus

On the USD side of the EUR/USD, yesterday’s surge in the Dollar Index chart didn’t have a convincing catalyst beyond the broader bond sell-off — and that’s hardly the stuff of lasting momentum. Rising debt jitters outside the US may have triggered some position-squaring, but with key economic data ahead and Fed easing likely later this month, I suspect the greenback will give back some ground.

We will have some key US data to look forward to as we head into the business end of the week, starting today with JOLTS job openings. It’s taken on more significance after Powell all but admitted that labour market risks are now more pressing than inflation. The data is expected to reveal 7.38 million job openings in July, excluding the farming industry. Granted, the data release is a bit out-dated, but it can nonetheless impact the market because job openings are a leading indicator of overall employment.

More significant data releases will follow on Thursday and Friday,

The ISM Services PMI will be released on Thursday. Though the less closely-followed S&P Global’s PMI data have shown improvement, investors and traders tend to focus more on the ISM data as a more reliable forward-looking indicator about the health of the world’s largest economy. The ISM services PMI has stagnated around the boom-bust level of 50.0 for several months now and that trend will need to improve if the dollar has any chance of a decent comeback.

Then it is all about the US nonfarm payrolls on Friday. Following last month’s much weaker jobs report and those big downward revision, the Fed Chair all but confirmed rate cuts were coming in September. This jobs report has the potential to dictate the pace of the next few rate cuts, or, if it comes in much higher, bring about fresh uncertainty about the near-term outlook for monetary policy direction.

For now, I see downside risk for the dollar into Friday’s payrolls, particularly if job openings point to cooling demand today.
 

EUR/USD technical analysis and levels to watch
 

(Click on image to enlarge)

From a technical standpoint, the EUR/USD looks relatively steady. The single currency continues to consolidate inside a triangle pattern on the daily chart, potentially gearing up for a bullish breakout soon. Short-term support for the EUR/USD comes in around the 1.1560-1.1620 range. Below that 1.1500 is the next key support to watch. On the upside, resistance is seen around 1.1700 where the resistance trend of the triangle comes into focus. Above that, the July high of 1.1830 is the next target. If and when we get there, the focus will then turn to the next psychologically important 1.20 handle next.

More By This Author: