EUR/USD Forecast: Overbought, so what? ECB fuel rally, Non-Farm Payrolls critical for next move
|- EUR/USD has been surging forward after the ECB's additional stimulus boost and dollar weakness.
- US Non-Farm Payrolls are set to show a loss of around eight million jobs.
- Friday's four-hour chart is showing overbought conditions that imply a correction.
More money, more honey – the European Central Bank's additional monetary stimulus has sent EUR/USD to the highest levels since mid-March, and the upwards march continues. US Non-Farm Payrolls are critical to the next move.
The ECB exceeded expectations by expanding its Pandemic Emergency Purchase Program (PEPP) by €600 billion to a total of €1.35 trillion. Moreover, the Frankfurt-based institution committed to reinvesting proceeds from this scheme and keeping it intact through June 2021.
Christine Lagarde, President of the ECB, said there was a unanimous agreement that action needed to be taken amid the coronavirus carnage. The bank staff's updated forecasts point to a loss of 8.7% in output this year. Fears of deflation were also part of the mix.
In the BC – before coronavirus – era, money printing weighed on the exchange rate. However, it is now providing more firepower for governments to stimulate the economy.
The ECB's decision came after Germany announced a large fiscal stimulus package worth €130 billion, also surpassing earlier reports. Europe's largest economy is set to shrink by 7.1% in 2021 according to the nation's central bank. Factory Orders plunged by 25.8% in April, worse than predicted.
See ECB Analysis: Frankfurt's firepower joins Berlin's boost, EUR/USD higher levels to watch
All in all, investors are sensing tthat Europe is finally getting its act together, ditching past austerity and debt concerns in favor of boosting growth.
Focus shifting to the US
The safe-haven dollar has been resuming its slide amid fresh optimism in America's stock markets. US Trade Representative Robert Lighthizer expressed satisfaction from China's compliance with the trade deal, countering criticism of Beijing by Secretary of State Mike Pompeo. Hopes for a COVID-19 vaccine is also in the mix.
However, the bigger picture for equities is ongoing support from the Federal Reserve.
Stocks dipped on Thursday and the safe-haven dollar saw some demand, a move partially attributed to rising coronavirus cases in Florida. The US is still not out of the woods, but investors' attention to bad news seems short.
Will Non-Farm Payrolls change the sentiment?
Economists foresee a loss of eight million jobs in the world's largest economy in May, with the unemployment rate nearing 20%. Wage growth is projected to remain high as many low-earners have lost their jobs – 40% of those earning below $40,000, according to a recent comment by the Fed.
The participation and employment-to-population rates will likely remain depressed. The bright side is that May's shedding of positions will likely be smaller than that seen in April, 20.5 million. Indicators leading toward the NFP were relatively upbeat, yet ADP's private-sector jobs report – which was highly correlated with the official figure last time – seemed too good to be true.
See:
- US Non-Farm Payrolls May Preview: Context is everything
- Nonfarm Payrolls Preview: Economic reopenings’ hopes to overshadow sluggish old numbers
EUR/USD Technical Analysis
The Relative Strength Index on both the daily chart and the four-hour one is above 70 – pointing to overbought conditions. That implies a correction. Other indicators such as momentum remain positive. W
At the time of writing, the daily and 11-week high is 1.1383, which may serve as immediate resistance. Further above, 1.1410 was a temporary cap in March and is the next line to watch. The peak in that turbulent month of 1.1495 is the upside target.
The daily low 1.1325 is the first support line. It is followed by 1.1255, which held EUR/USD down on Thursday, just before the surge. It is followed by 1.12 and 1.1150.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.