EUR/USD: Something's got to give

Even with the benefit of a weekend to digest it, market participants are still struggling to put a bullish spin on Friday’s NFP report. In fact, for many traders, the disappointing jobs report has pushed expectations for interest rate “liftoff” into 2016: according to the CME’s FedWatch tool, fed funds futures traders are only pricing in a 30% chance of a rate hike this year, and the odds don’t break above 50% until March of 2016.

With that backdrop, it’s no surprise that the US dollar is struggling early in this week’s trade. The dollar index, which measures the strength of the world’s reserve currency against six of its biggest rivals, continues to hold below its 50-day moving average while its biggest component, EUR/USD, continues to hold above its own 50-day MA. Taking a step back though, EUR/USD is clearly trapped between a bullish rock and a bearish hard place.

To the downside, there is strong near-term support at the 1.1100 level, which has put a floor under rates twice in the last month. Below there, the rising trend line off the 12-year low from earlier this year comes in around 1.10, and longer-term traders will remain cautious above that level. The recent “golden cross” of the 50-day MA above the 200-day MA has turned some traders optimistic on the longer-term prospects for the world’s most widely-traded currency pair, but there are some clear bearish hurdles to clear first.

Specifically, Friday’s rally stalled out directly at the bearish trend line off the late August high and the unit remains below that resistance area (1.1300) as of writing. Meanwhile, the RSI indicator is trapped within its own corresponding downtrend, so more conservative readers may want to see if both the exchange rate itself and the RSI indicator can break above their bearish trend lines before turning more optimistic on EUR/USD.

The range between the bearish trend line and support in the 1.10-1.11 zone is becoming increasingly tight, foreshadowing a likely breakout in the next week or two. In terms of potential catalysts, traders should monitor today’s US ISM Services PMI report, the Eurogroup/ECOFIN meetings (concluding on Tuesday), ECB President Draghi’s speech in Frankfurt (also on Tuesday), the FOMC meeting minutes (Thursday), and Fedspeak from FOMC members Williams (Thursday), Lockhart, and Evans (both Friday).

Intraday traders may still find some short-term opportunities in EUR/USD, but everyone else may want to wait for a confirmed breakout before committing too strongly in either direction.