The euro is softer against the US dollar at the start of the new week but we continue to expect the EUR/USD to tread higher.
Monday sees the US dollar recapture some lost fround having suffered some notable declines on Friday the 3rd June. The decline in interest rate expectations regarding the Fed after the release of the US labour market report helped the euro to achieve significant gains against its US counterpart.
The move higher in EUR/USD saw the technical structure of the market gain a more constructive feel.
"While buy signals dominate the daily chart, risks still prevail in the weekly chart. However, as the euro has surpassed the resistance at 1.1297 (38.2% level), further resistances are now seen at 1.1377 and 1.1400. The 61.8% correction level is also found at 1.1419. Our favoured trading range: 1.1295 – 1.1420," says Ralf Umlauf, a trader with Helaba Bank in Frankfurt.
Our studies suggest the EUR/USD chart is now bullish as price action continues describing a text-book channel higher:
Most recently the pair spiked up off a support cluster at 1.1100 provided by the base of the channel and several major moving averages; after the sharp fall in US payrolls, weighed on the dollar.
Blackwell Global Markets’ Matthew Ashley expects the pair to continue oscillating higher within its rising channel, until it reaches the upper border at roughly 1.18.
The euro is also supported by the fact that most valuation models, see it as undervalued against the dollar, with some models suggesting it should be nearer 1.20.
There is resistance from the 50-day moving average which is attempting to hold back the advance at 1.1312, however, a break above 1.1390 would confirm the 50-day was history and see a probable continuation up to the next bar at 1.1460.
The MACD indicator in the bottom pane is showing a bullish cross of its signal line, which combined with the other signals enhances the bullish outlook.
US Employment Situation Hits Dollar Lower
As far as the week ahead goes, we expect a continuation higher as markets digest the shock non-farm payroll results.
Because it was over 89k lower than expectations, research shows there is a 90% probability the pair will end the month above the price at the time of the release, which was 1.1155.
NBF Economics, a subsidiary of National Bank of Canada, who analysing the results, showed April and May added together made the worst two-month Non-Farm Payrolls (NFPs) tally for four years – and that is accounting for the 35k striking Verizon workers as well!
“There’s no way of sugar-coating May’s US employment reports because they were awful across the board,” remarked NBF’s Krishen Rangasamy, adding:
“The weak employment numbers will likely prompt a rethink at a Fed that wants to hike interest rates this summer.”
Further, they dismiss the implausible fall in the Unemployment Rate to 4.7% (from 4.9%) as solely due to the dramatic fall in the participation rate.
Research has shown that when Non-Farm Payrolls misses its estimate by over 89k, as it did in May, there is a high probability that the dollar will close the month at a lower level than that which it was at just before the release of NFPs.
For GBP/USD this was 1.4432. It is highly likely the exchange rate will not end June below that level.
Whether the EUR/USD tracks much higher, depends on the commentary of Janet Yellen when she gives a speech on Monday.
If she upholds hopes of a 2016 rate hike - probably now in September or later the dollar may stabilize, but if she decides to question the whole policy and return to a wait-and-see stance, the euro will likely shoot higher in a further volatile up-leg.
Five Day Outlook for the Euro
Apart from final estimates of Q1 GDP on Tuesday, the economic calendar for the Eurozone looks peculiarly empty in the coming week.
Analysts are not expecting any surprises since Tuesday’s release will be the third and final estimate of GDP growth in Q1 so it is unlikely to see further revision.
Previous estimates showed an initial 0.6% which was revised down to 0.5% qoq respectively.
The preliminary 0.6% rise was viewed as extremely positive by analysts as it was double the 0.3% consensus forecast.
There is of course a risk of a further downward revision in the final estimate. If this was the case it would probably weigh on the euro.
Such a downgrade would risk proving the ECB was being overoptimistic in its whole year forecasts which it recently upgraded from 1.4% to 1.6% at its meeting on Thursday. Current annualized forecasts sit at 1.5%, with no change expected in the final revision.
Despite the ECB’s upward revisions to its growth and inflation forecasts some market observers read underlying concern in both the statement and the rather subdued press conference chaired by Draghi and his deputies.
In particular, the new phrase about growth rising at a slower rate in the second half of 2016 raised alarm bells, as it indicated an even shallower trajectory than the gentle slope already describing the area’s growth rate.
Also for the first time Brexit fears were mentioned as a potential risk factor for growth, which infers the euro may start to correlate with the pound as traders position themselves ahead of the referendum vote on the 23rd.
The release of Industrial Production on Tuesday June 7, for a number of countries, notably Germany and Spain, on Tuesday June 7 will make an insightful contribution to estimating Eurozone second quarter growth.
According to information provider Markit, recent poor manufacturing PMI’s indicate industrial Production may miss expectations too, and Q2 could show a slow-down in growth:
“The data (Industrial Production) will provide analysts with important information on assessing the health of the region’s economy in the second quarter. Markit’s PMI results signalled that manufacturing in the euro area remained stuck in a low gear in May, with France and Greece key areas of concern. Worryingly, previously fast-growing countries such as Spain and Italy also showed some weakness. It is therefore likely that industry will dampen GDP growth in the second quarter after a surprisingly brisk start to the year.”