Could EUR/USD actually rally?

The next five trading days is going to be very important for the EUR/USD, and indeed many other markets. This week’s focus is predominately on the dollar due to the sheer number of top tier data releases, although we have had a fair bit of Eurozone data too. Next week, the focus will be on the ECB with the central bank widely expected to expand its bond-buying stimulus programme. But there is scope for disappointment, which – like early December – could see the euro surge higher. Traders will need to be wary of that possibility. Whatever the outcome, there should be plenty of short-term trading opportunities on the EUR/USD to look forward to.

US data from the end of last week shows a rise in US core PCE Price Index (a measure of inflation), improvement in consumer sentiment and above-forecast rises in both personal income and spending, all on a month-over-month basis. This week’s data has been mixed thus far. The Chicago PMI fell below the expansion threshold of 50 (to 47.6) and pending home sales declined 2.5% month-over-month, both disappointing expectations. But the ISM manufacturing PMI was stronger-than-expected at 49.5 (though still below 50), while construction spending rose 1.5% m/m and the ADP payrolls report showed a solid rise of 214 thousand in private sector non-farm jobs. The key data for the dollar will be released today and tomorrow: ISM services PMI and the official non-farm payrolls report for the month of February. The PMI is expected to come in at 53.2 today while tomorrow’s headline jobs figure is seen at 195,000, with the unemployment rate steady at 4.9% earnings up 0.2% month-over-month.

If the actual US data meets or beats these expectations then the dollar could rally, while disappointment could be the perfect excuse for the bears to reduce their short EUR/USD exposure ahead of the ECB meeting. In fact, it could even lead to some opportunistic buying in the world’s most heavily-traded FX pair in anticipation of anti-climax from the ECB come Thursday.

Recent data from the Eurozone has been far from solid, but also not as bad as feared. Inflation data was poor. In fact, consumer prices tumbled to deflation territory in February, with the CPI printing -0.2% versus +0.3% in January while core CPI eased to +0.7%. However, the unemployment rate fell slightly to 10.3% and retail sales grew 0.4%, both topping expectations. Meanwhile the services sector PMI has been revised up a tad. So, it is not all doom and gloom in the Eurozone but the weaker inflation numbers and still-low oil prices could be enough for the ECB to further expand its QE programme next week. But will it?

Turning our attention to the technicals now and as both the daily and weekly charts show, below, the EUR/USD has arrived at a major support zone around 1.0850. This is where the upper side of the long-term broken bearish trend line meets the 61.8% Fibonacci retracement against the rally from the December low. From a technical point of view therefore the EUR/USD could be forming potentially a long-term base here. Also, observe the daily candles and the momentum indicators on the daily chart. You should be able to see a couple of hammer-like candlestick formations, which are usually formed at trend lows. Meanwhile the slow stochastics is potentially about to turn higher from “oversold” levels, while the MACD is still trending lower below the signal line.

While there is a possibility for a nice bounce here, if the EUR/USD breaks below the 1.0800/50 area decisively then all bets are off. In this potential scenario, a revisit of range lows around 1.0500 (1.0460-1.0530) would be a strong possibility.