• Gains were short-lived
  • FOMC decision and NFP are key

The common currency was rallied initially but fully retraced on the European Central Bank meeting last Thursday.

As expected, the ECB held benchmark rates steady and sent clear signals that relaunching of the easing packing will bring back to the table in September meeting.  As we highlighted in last week’s note, only the Fed rate cut is the only available lifeboat for the EUR in the near-term. The upcoming easing measures from ECB could depreciate the EUR further.

Forward guidance “We expect them to remain at their present or lower levels at least through the first half of 2020”

Easing package “The Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.”

In terms of macro data from last week, the eurozone July PMIs report suggest that the weakness in the EZ economy is spreading over to the other pockets.

  • Flash Eurozone Manufacturing PMI declined to 46.4 from 47.6 in June. 79-month low.
  • Flash Eurozone Services PMI Activity Index at 53.3 from 53.6 in June. 2-month low.

IHS Markit said, “Manufacturers reported the second-largest drop in new orders since 2012 and service sector inflows of work slipped to the second-lowest in five months”.

Following the ECB meeting, we will have a big week ahead with Central Bank monetary policy meetings (FOMC, BOJ, and BOE) among top-tier events to keep forex traders busy. Data wise 2Q Eurozone GDP and July US non-farm payrolls will keep trades busy.

FOMC meeting: The market participants and we are widely expected to cut rates by 25bps, and the market has already priced in the quarter-percentage-point interest rate cut. The big discussion will be “What’s next?” Is it an insurance cut or the Fed could stretch deep in the coming quarters and into next year as well, which is the key concern to the market participants? We are not discounting the fact that economic data releases since June Fed meeting have been stronger than expected.

Eurozone GDP: With the July PMIs giving up the May and June gains, the pace of the GDP growth looks set to weaken sharply.

TECHNICAL VIEW

This week’s Fed rate cut is a decisive factor to the euro bulls, but the Draghi killed that view on sending clear dovish signals last week. Any gains will be short-lived and limited.

The common currency traded back at virtually unchanged levels, besides the dollar index, is rallying back to June high. At Monday’s close, the EURUSD was higher 20pips to close at 1.1145 withholding above the crucial support level 1.1050-1.1100. The relentless bearish sentiment indicated that the trend is still in favor of bears, and the next crucial level watch out for would be 1.1050.

However, there will be bounce-backs (Fed rate cut) for trades to short their positions on rallies.

The daily RSI is stabilizing but lacks momentum, whereas the oscillator is releasing positive vibrations. On the back of this setting, as long as 1.1100 is supported watch out a pullback to the key resistance levels located between 1.1180-1.1200. A decisive breakout and close above 1.1215 could allow the price to rally further towards the next key resistance level 1.1280.

Flipside, if the price lost 1.1100 wait for 1.1050 and 1.0960. Note that 1.1000 is a psychological support level.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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