Eurozone PMI slips to 20-month low; Pound slides to 31-year low vs the dollar and 6-year low vs the euro; EUR/USD Bearish

The U.S. dollar soared against the yen on Wednesday as the need for a safe haven diminishes and was steady against other rivals ahead of tomorrow’s non-farm payrolls report that could reinforce expectations that the Federal Reserve will hike interest rates by December.The single currency traded mixed against its other G10 counterparts following the euro zone PMI survey which showed that business activity has slumped to its weakest level since January 2015. The British pound recovered the last two sessions, however, it remains under selling pressure after recording a 31-year low versus the greenback and a 6-year low against the euro. There is very little to move the markets today as everyone waits for tomorrow’s release of the U.S. non-farm payroll report.

The dollar was higher at the start of the European day vs GBP and CHF, but by mid-day, it had lost all of those gains; on the other hand, it made its biggest gains vs JPY and NOK with the AUD not far behind. In the U.S., ahead of tomorrow’s NFP report, the ADP employment change came in slightly disappointing, as the private sector employment increased by 154K in September, slightly below the 166K expected. Still, economic activity in the non-manufacturing sector grew strongly in September, as the ISM non-manufacturing PMI saw a big rebound in September after having slowed to more than a six-year low in the previous month. The ISM PMI came in at 57.1 vs 51.5 while new orders for factory goods in the U.S. increased in August 0.2% from a downwardly revised 1.4%  increase the previous month, indicating that the American economy is beginning to pick up traction.

The euro traded mixed against its other G10 counterparts despite the doubtful ECB’s tightening headlines that triggered the recovery and generally encouraging data released in the U.S.  The EUR/USD pair trades flat for a third consecutive day, around 1.1200, but still remains under selling pressure.In Europe, the Markit composite PMI for euro zone indicated that the rate of economic expansion across the euro zone eased to a 20-month low in September while the Markit services PMI for the region plunged to a 21-month low, 52.2, in September. Moreover, retail sales in the euro zone fell less than expected -0.1% vs -0.3% mom. This is the first monthly drop since March and comes in a sign that the Brexit may have had a greater impact on the euro zone than previously thought.

EUR/USD remains under selling pressure below the descending trendline

The EUR/USD pair trades flat for a third consecutive day, stuck around the 1.1200 region, the price zone reached after a horrid U.S. non-farm payroll report put the greenback in sell-off mode, reaching an intraday low that day at 1.1140. The pair is still establishing within a symmetrical triangle and had several failed attempts to break it in either direction. The pair is nearing the apex of the triangle and a breakout is expected anytime soon.The descending trend line coming from this month high stands around 1.1240, and ahead of the U.S. NFP report to be released tomorrow, seems unlikely the pair will move out of its usual range during the today’s session.

The pair is correcting the overbought conditions reached in daily chart, following the test of the trend line in mid-September, although additional gains seem limited in the short-term, as in the 4-hour chart, the pair is trading slight below a bearish 50-100-200 SMA’s while technical indicators have lost their bullish strength after entering positive territory.

Therefore, for today we could see the pair trading in a range between the 1.1150 and 1.1200 before go more south, towards the 1.1120 – 1.1130 zone, which is my weekly target. A break of the aforementioned zone could lead to deeper losses, back to the key support level at 1.1100 although at this stage this looks too far off to worry about.

Pound recovered but remains under pressure

Sterling’s weakness driven by Brexit uncertainty, and after UK Prime Minister Theresa May set a deadline to begin exiting the EU, persisted over the last two trading sessions. The pound recovered for a second consecutive day against its G10 currencies. The pound managed to escape from a 31-year low, 1.2685, against the U.S. dollar and surged more than 0.5% versus the Japanese yen after the UK's Markit services PMI for Septembercame out above market expectations. The final September reading came in at 52.6, beating expectations of 52.2. The British pound has dropped 15% against the dollar and 14% versus the euro since the June 24 vote to leave the EU.

The pound fell to a 31-year low against the dollar

The GBP/USD pair remains under pressure as is trading below an intraday high of 1.2772. All of the moving averages are bearish while momentum indicators remain negative over the short and the medium terms. The technical structure suggests further downside move as the technical indicators on the daily chart are biased lower after entering the negative territory. The MACD oscillator is moving below both, its zero and trigger lines suggesting a stronger bearish momentum in the next few weeks. In addition, the Relative Strength Index (RSI) is following a downward path near 30, confirming the recent bearish attitude of the price. All in all, we expect the pair to retest the 31-year low and to reach 1.2660. 

Sterling hits 6-year low against the euro

The EUR/GBP pair is currently trading at its highest level since October 2010. The pair is trading 1.65% so far this month and has risen in 8 of the past 10 months, following the strong rebound from the 0.6940 region. For now,the trend remains upward based on medium-term charts and will require a larger decline in order to begin to put downward direction.As for the short-term picture, the pair is currently approaching the 0.8850 level, having tested the 0.8844 during the Asian session. The key 23.6% Fibonacci level will be the first obstacle for the bears, around 0.8440. Beyond that level, the key 0.8250 – 0.8320 zone will be the second serious obstacle for the bears, which includes the 4-hour 50-SMA and 200-SMA, but for now, I do not see any reason the pound to gain traction and therefore we remain bullish on this pair.

Yen plunges against the majors

The Japanese yen plunged to a one-month low against the dollar and it was lower against the other two big currencies, the euro and pound. The greenback recently was up 0.59%, on track for its eighth consecutive session of gains. It is very significant, that the USD/JPY is trading above the descending trend line, which started back in December 2015, as well as above both, the 50-SMA and the 100-SMA. Over the medium-term, the bulls will eye the 200-SMA, near the psychological level at 106.00. However, before reaching that region, they should go through the 104.50 and the 105.00 marks, two significant levels that the short-term traders should watch.

The EUR/JPY pair is looking a little more bullish this morning, having found strong resistancelast night around 106.00, a strong technical and psychological level over the short and medium terms. The pair is trading above the 100-SMA on the daily chart, which indicates that the bulls are strong over that timeframe and the 50-SMA is sloping upwards ready to challenge the 10-SMA, another bullish sign that the bulls took control over the short to medium term. The response this morning while being positive is not indicative of a market that is bullish following the completion of a correction. This should be confirmed in the coming days by the pair’s ability, or inability, to make new highs, breaking yesterday’s 106.00. A break of this level would suggest that a trend reversal is on the cards. A failure, on the other hand, would suggest this period of weakness is far from over and we would expect the pair to switch into a consolidation mode below the 106.00 mark.

What to watch today

There is very little to move the markets today as everyone waits for tomorrow’s release of the U.S. non-farm payroll report. Ahead of that,the German factory orders of August are forecasted to have been up 0.3% mom, from 0.2% mom in July. The focus of the day is the ECB Monetary Policy Meeting Accounts. In addition, in the U.S., the weekly initial and continuing jobless claims are coming out. In Canada, building permits are expected to show an increase in August by 3% from 0.8% the previous month.