The EUR to USD conversion is has failed to overcome 1.14 this week but the bulls should not yet give up say Westpac.
The euro has capitulated against the US dollar at the key 1.14 resistance hurdle and bulls will question whether there is an appetite within the the market to push the advantage.
Analysts at Westpac Institutional Bank are gearing up for further advances saying they are opening a fresh EUR/USD long at 1.1358 with a stop 1.1240.
Westpac reckon softer US retail sales due out next week could weigh on the USD while the FOMC is likely at best neutral if not negative for the USD too.
"The key US core control retail sales group is due a correction after last month's unsustainably strong 0.9% gain. Soft payrolls add an extra layer of caution over the health of the consumer," say Westpac.
The FOMC could downgrade their assessment of the labour market given May's poor showing. The Fed is unlikely to signal a balanced risks assessment either.
"With that the results of the UK referendum still unknown and pending June payrolls it would make little sense for the Fed to signal that their next meeting (27 July) is live. But, with a majority of 9 among 17 members calling for 2 hikes in 2016 it seems unlikely the median will shift in the 2016 dots," say Westpac.
It is suggested that this group would need to move almost en masse to force that median down to 1 hike.
The distribution of dots around that median should take on a dovish bias though, certainly the 7 calling for 3 to 4 hikes this year could see some trimming, if only because there is one less meeting this year.
"The long term neutral rate (3.25%) probably comes down another 25bp, as it has done so at virtually every dot plot refresh in recent years. All told hardly a USD bullish backdrop," say Westpac.
A Notable Development on the Charts
EUR/USD has finally moved above the halfway point of its recent retracement lower off the May highs.
It is now facing a similar struggle at the 61.8% fibonacci level at 1.1415.
Fibonacci retracements have strong predictive powers for currencies.
Whilst it may seem implausible that a concept from the work of a 14th century mathematician - Leonardo Fibonacci - could be the focus of current activity in the most heavily traded currency pair in the 21st century global economy, EUR/USD, it does appear so.
From his work on rabbit reproduction, Fibonacci came up with a set of ratios which simply put describe 'growth'.
The most importnaty ratio corresponds to 61.8%, ortherwise known as the Golden Mean, and has been found to be useful in determining the extent of corrections in financial markets. Analysts have found that often moves reverse at the 61.8% retracement level.
From there they often resume 'growth' in line with the dominant trend.
EUR/USD is currently trading at just under the 61.8% level of it previous move, the wave down from the May 3 1.1620 highs to the May 30 1.11 lows, at 1.1415.
The pair corrected higher following Friday's shockingly low Non-Farm Payroll's result which damaged the outlook for the dollar.
It stalled, however, at the important 50% bar at 1.1357, probably due to counterbalancing supply from other traders trying to trade counter to the trend, in an attempt to profit from the expected pull-back.
The steepness and strength of Friday's spike higher suggested the Bulls would win an the pair would eventually break above the 50% Fibonacci level, and continue rising.
This happened and the pair has now reached the key 1.1400 level which for us signals a continuation higher.
We think it probable that from here there will be further upside towards the next target at 1.1460 where the R1 monthly pivot is situated, another level where traders tend to cluster and trade counter to the dominant trend.
A bullish cross on the MACD indicator in the pane below is further reason to expect more upside.
Commerzbank's Karen Jones is not so bullish and expects the rally to run out of steam in the 1.14s before resuming its downtrend towards the 1.05 lows.
"Between here and resistance at 1.1465/95 (early April 2016 high and the October 2015 high) we should see the rally grind to a halt." She says, before adding:
"The base of the 6 month channel is expected to act as the breakdown point to the second channel at 1.0564."
Singapore lender OUB's FX Strategist, Quek Ser Leang, however, is more bullish like us:
"The strong rally that started late last week appears incomplete and we continue to expect a move towards 1.1400 where a break would shift the focus to 1.1450." Leang notes.
Recent research from Bank of America Merril Lynch, which shows a degree of persistence in dollar weakness following an unexpectedly low Non-Farm Payrolls result also supports our positive outlook for the pair.
The BofAML study showed the dollar index fell on average 3.0% in the 90-days following a grossly out of expectation, negative NFP, with 30 and 60 days also registering losses too, in the region of 1.5% and 2.% respectively.
ECB Shifts into Fifth Gear
The European Central Bank has finally kicked off its corporate bond-buying program and investors applauded the move by driving the euro above 1.1400.
The ECB has for the first time started buying bonds from telecom, insurance and utility companies for the first time in an effort to stimulate Eurozone inflation levels.
Typically, the forcing down of yields would be a negative for the euro exchange rate complex, as has been in the past, but markets took the opposite view and bought euros.
"While this reaction may be counterintuitive especially as Eurozone corporate bond yields dropped to its lowest level in more than a year, their aggressive start gave investors hope that this additional stimulus plus the TLTRO program beginning on June 22nd will be effective in stimulating inflation and growth in the economy," says Kathy Lien, a Director at BK Asset Management.