EUR/USD August Advance to Unravel Further on Dovish ECB, Upbeat NFP

Fundamental Forecast for Euro: Bearish

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The sharp pullback in EUR/USD may gather pace in the week ahead should the European Central Bank (ECB) signal a further expansion of monetary policy, while another 200K+ U.S. Non-Farm Payrolls (NFP) print may boost expectations for a September Fed rate hike as the committee largely retains an upbeat outlook for the world’s largest economy.

Even though the ECB is widely expected to retain its current policy at the September 3rd meeting, the Governing Council may show a greater willingness to expand/extend the scope of its quantitative easing (QE) program as the slowdown in global growth accompanied by the renewed decline in energy prices dampens the central bank’s scope to achieve its one and only mandate to achieve price stability. As a result, a more dovish statement delivered by ECB President Mario Draghi may fuel speculation for additional monetary support, and the Euro remains at risk giving back the advance from late-July should they key developments highlight a growing deviation in the policy outlook.

With only so much data prints remaining ahead of the Fed’s rate decision, the August NFP report may play an increased role in shaping market expectations, and a further expansion in U.S. job growth paired with a downtick in the unemployment rate may boost bets for a rate hike as Fed Vice-Chair Stanley Fischer argues that September remains on the table for liftoff. However, recent comments from New York Fed President William Dudley appears to be highlighting a growing dissent within the committee as the permanent voting-member sees a ‘less compelling’ case of higher borrowing-costs, and the fundamental developments due out in the coming days may set the near-term outlook for EUR/USD as the central bank remains ‘data dependent.’

In turn, the key event risk due out next week may produce a further decline in the euro-dollar, and signs of a greater divergence in the monetary policy outlook may ultimately produce a resumption of the long-term downward trend should the Fed remains on course to remove the zero-interest rate policy (ZIRP). Moreover, the euro-dollar may continue to give back the advance from late-July amid the recent series of lower highs & lows in the exchange rate along with the failure to hold above former resistance around 1.1180 (23.6% expansion) to 1.1210 (61.8% retracement).