In the first half of Wednesday’s session, we have seen a slight recovery in global indices and futures from their overnight lows, providing a calmer backdrop in the FX space after currency volatility rose on Tuesday as US markets resumed trading after the extended Labor Day weekend. It was a tech driven sell-off on Wall Street that triggered a classic risk-off trade in FX markets, as safe-haven currencies such as the JPY, CHF and USD all gained ground against high-betas such as the AUD and NZD, as well as the GBP and EUR. The EUR/USD’s drop on Tuesday therefore hardly had anything to do with the day’s only major US data release: the ISM Manufacturing PMI, which was a mixed bag. Despite Tuesday’s drop, our modestly bullish EUR/USD forecast remains intact, ahead of more US data releases this week. The Eurozone calendar is fairly light this week in terms of major market-moving data.
JOLTS in focus
In as far as today’s key US data is concerned, the focus will be on the US jobs market with the release JOLTS job openings at 15:00 BST. Job openings are expected to have slowed to 8,100k in July, down from 8,184k in the previous month. If we see further evidence of more people becoming unemployed than there are job openings in the coming months, this will raise fears about the health of the jobs market and will warrant a shaper easing stance from the Fed.
US services activity more important than manufacturing for USD
Yesterday, the headline ISM manufacturing PMI rebounded slightly less than expected to 47.2. This was offset by a slump in new orders sub index which dropped to its lowest level since May 2023. What’s more, prices paid jumped to 54.0, suggesting the inflation battle is not completely over yet.
The ISM manufacturing PMI has been in contractionary territory for about 2 years now, with the exception of a rebound in March this year. It has been the services sectors that has done the heavy lifting during this period. Thus, ultimately, it will be up to services to drive growth. This means that tomorrow’s release of the ISM services PMI could have a much bigger impact on the markets, before the focus turns to Friday’s US non-farm payrolls report.
US data needs to deteriorate to warrant 100 bps cuts for 2024
The market is currently pricing in around 100 basis points of cuts for 2024. Given that there are only 3 FOMC meetings left before the year is out, the central bank is expected to cut by 50 basis points in one of these meetings and by 25 bps in each of the other two. For the Fed to cut rates by 50 bps we will need to see a clear signs of a marked slowdown in jobs growth and/or evidence to suggest the US is heading into a recession.
Therefore, a substantial further decline in the dollar would require notably bearish US economic data this week. While Friday's payrolls report may well disappoint, there may not be enough negative news before then to drive the dollar sharply lower. But any data-driven upside should be limited given the Fed’s clear signal that it will cut rates.
Put simply, weakness in US data is needed to keep the pressure on the US dollar, while the upside for the greenback should be limited on any data surprises because of the Fed’s strong indications that rate cuts are starting this month. This makes me bearish on the dollar and therefore bullish on the EUR/USD forecast.
EUR/USD forecast: Technical analysis and trade ideas
Source: TradingVIew.com
Since bottoming in April, the EUR/USD has formed several higher lows and higher highs. The slope of the 200-day average has started to turn positive. Rates have broken several resistance levels and bearish trend lines. In other words, the path of least resistance on the EUR/USD has been bullish. It will remain that until we see a key reversal pattern or a break down in the market structure of higher lows. So far, neither of these events have occurred, which means that the EUR/USD forecast remains bullish from a technical point of view and that we favour looking for bullish setups at or near support than bearish setups near resistance for trade ideas.
The key area of support on the EUR/USD is now seen between 1.1000 to 1.1045, previously resistance. Here, we also have the 21-day exponential moving average come into play. We are on the lookout for the formation of a bullish price candle around this zone this week to signal the resumption of the bullish trend. If we don’t see that, say as a result of surprisingly strong US data, then that could pave the way for a deeper correction towards the next key support around the 1.09 handle.
Potential resistance is seen around 1.1100, followed by 1.1140. The liquidity above the August high of 1.1200 is the next major objective for the bulls should the aforementioned resistance levels break.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
