EUR/USD Weekly Forecast August 7-11
Frankfurt (Aug 6) EUR/USD advanced in the early week but gave back a bulk of the week’s gains on Friday after the US jobs report. While the pair has posted a fourth consecutive weekly rise, the gain was marginal and a reversal candle has printed on a weekly chart which signals the potential for further losses in the week ahead.
In addition to the weekly print, EUR/USD has also broken below a rising trend channel that had contained price action from early July. Similar technical breaks are seen in several of the majors as GBP/USD has broken below a six-week rising trendline and USD/JPY has broken above a declining trendline from July highs. Reversal candlestick patterns are also seen in the major commodity pairs.
The jobs report exceeded expectations with a headline increase of 209,000 jobs. The unemployment rate ticked down to 4.3% as expected and average hourly earnings ticked up to 0.3%, also as expected. Annually, averages wages rose 2.5% which was ahead of an expected 2.4%.
The jobs report combined with the PCE price index holding steady earlier in the week has removed some of the doubt over the Fed’s view that inflation is moving towards the 2% target over the medium term. However, the data did not have a significant impact on monetary policy expectations priced in by the futures markets as the odds for a third hike by the end of the year rose only modestly from 46.8% to 48% on a week over week basis.
With the PCE price index data and average hourly earnings data hinting that inflation may start to pick up, the focus in the upcoming week will be the US consumer price index figures which are scheduled for release on Friday. On a monthly basis, CPI has fallen short of expectations in the last four readings. Analysts are looking for a rise of 0.2% versus an unchanged reading for June and a rise of 0.2% in core CPI for July following a gain of 0.1% in the prior month.
Euro bullish sentiment has faded as indicated over the past two COT reports although the decline in the net long has been modest. Non-commercials reduced net long exposure from 90,842 contracts to 82,637 contracts with a draw in gross long contracts outpacing the build in gross short contracts. Despite the recent reduction, the euro remains the largest net long among the majors by a significant margin and as such, EUR/USD is exposed in the event of a bullish dollar continuation in the upcoming week.
The turn lower in EUR/USD in the past week followed a test of important support in the US dollar index (DXY). A level at 92.62 marks the 2015 low that also held DXY higher in 2016, as seen on a daily chart. The index tested the level on Wednesday and turned firmly higher to show a strong buying presence. There was a slight divergence in the inverse correlation between the index and EUR/USD as DXY closed the week with a small gain.
Sellers are likely to step in to defend a retest of the broken rising trend channel in the event of a recovery in the currency pair. Horizontal resistance levels near the bottom line of the channel fall at 1.1800 followed by 1.1825.
EUR/USD closed the week above 1.1767 which is a respected level on a weekly chart. The level will be the first hurdle to the downside. Further support is seen at the 2015 high of 1.1717 followed by the 2016 high of 1.1616.
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