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Dollar starts Q4 higher but could struggle later

After showing a positive reaction to the Federal Reserve’s rate hike last week, the US dollar was again generally supported on the first day of the new month and quarter. However, it remains to be seen how the greenback will fare later on in the week, given the sheer number of upcoming economic data releases from the world’s largest economy, culminating with the release of the key employment report at the end of the week. While the US dollar was strong, it was actually the Canadian dollar which stole the show again as it was boosted by news that Canada had reached an agreement with the US and Mexico to overhaul NAFTA and replace it with a new deal called USMCA. The new deal has basically removed months of uncertainty over trade, more or less paving the way for another rate hike from the Bank of Canada later this month. The NAFTA breakthrough was initially welcomed by equity markets with all the major global indices trading higher earlier, before giving back some at the time of writing.

Eurozone unemployment hits post-crisis low

Meanwhile, the euro was on the back foot again this morning despite fresh data showing Eurozone unemployment fell to a new post-crisis low in August. At 8.1%, this is the lowest rate of unemployment in the Eurozone recorded since November 2008, thanks largely to Germany where unemployment is at the lowest at 3.4%. While the unemployment rate in Greece still remains the highest at 19.1%, there has been consistent sharp falls in the jobless rate recently – and not just in Greece, but also in Cyprus and Portugal, among other places. The improving labour market conditions in Europe may lead to higher inflation over time through a pickup in wages, thus removing the need for monetary policy to be extraordinarily loose. The ECB has recently turned bullish on their outlook over real inflation, suggesting that interest rates are likely to rise next year as expected, but perhaps sooner and maybe at a faster clip than previously envisaged.

EUR/USD’s breakdown could be short-lived

Thus, the single currency could be in for a rally in the coming months as the markets start to price in a rate hike from the ECB. But in the short-term, there will be lots of volatility and scope for further weakness. Technically, though, the EUR/USD is still clinging onto its bullish bias despite last week’s sizeable pullback that resulted in the formation of a bearish engulfing candle on the weekly chart, as price is still holding above that pivotal 1.1530 level. If last week’s bearish engulfing candle pattern is indeed a valid bearish signal then the EUR/USD should waste no time in heading further lower now. If this is the case, then we could see a breakdown of that 1.1530 support and a potential drop back to 1.1430 support or even 1.1300 in the days to come. However, if rates were to go back above last week’s low (1.1570ish) following a brief breakdown then this would signal that the bears may have gotten trapped. In this scenario, we could see a quick rally above last week’s high of 1.1815 as this is surely where the next big pool of liquidity will be resting. That being said, there is some intermediate resistance on the way at 1.1715-1.1735, an area which was previously support and resistance.


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