EURUSD: Will Ongoing Hawkishness Damage the Pair?

Key Points:

• Euro Dollar damaged by hawkish Fed comments.

• Retreat towards 1.1042 likely in the coming week.

• Continued hawkish statements expected from Fed.

The Euro had a relatively torrid week as there were some sharp swings as speculation mounts over a potential September rate hike from the US Federal Reserve. As the pair heats up, it is salient that we take a quick look at what occurred last week and what is potentially on the horizon for the pair in the coming week.

The Euro experienced a relatively rough week which saw it sliding sharply lower following a sentiment swing towards the US Dollar late in the week. The move was largely fuelled by US Fed Chair Yellen whom suggested that economic and labour fundamentals were very close to nearing the central bank’s goals and that September is therefore a live meeting. This statement sent the currency pair into a tail spin and saw the Euro fall by around 100 pips before closing well down at 1.1190. Further adding to the selling pressure was a surprise contraction in the EU M3 money supply from 5.0% to 4.8% y/y.

Looking ahead, the coming week is likely to be critical for the Eurodollar given the renewed focus upon the US labour market as a predictor of a September rate hike. Subsequently, Friday’s US Non-Farm payroll figures are going to be closely monitored by the market as participants look for any hint of what’s to come. Therefore, given the difficulty in forecasting the NFP, a volatile surprise is highly likely.

In addition, the Eurozone CPI Flash Estimate is also due out and any failure to reach the forecasted 0.3% gain could lead to further bearishness. The risk of a poor result is ever present given the general trend of slipping Eurozone indicators over the past week. In fact, the both the NBB Belgian Business Climate Index and the Manufacturing PMI figures proved highly disappointing. Subsequently, there are plenty of reasons to expect a relatively lacklustre CPI result from the EU.

From a technical perspective, the pair’s retreat from the 1.1365 high is continuing and suggests that a corrective move back towards the 1.1042 mark is now underway. In addition, price action is now sitting just above the 100-day MA and a subsequent breach of this level will see the pair move decisively lower. The RSI Oscillator also continues to trend lower, within neutral territory, lending weight to the argument that further downside correction is likely in the short term. Support is currently in place for the pair at 1.1177, 1.1095, and 1.0950. Resistance exists on the upside at 1.1365, 1.1426, and 1.1533.

Ultimately, the pair is likely to feel further pain in the week ahead as it seems relatively unlikely that the Fed will back away from their communicated desires to raise the FFR in September. Given the long list of FOMC members due to speak over the next 72 hours, it seems a relatively sure bet that they will be pushing the barrow of rate hikes which will only seek to further depreciate the Euro Dollar.