EUR/USD Forecast: 3 reasons for not holding the highs as eyes focus on the NFP

EUR/USD is trading in the mid-1.1400s, back to familiar ranges. The effect of the dovish Fed decision ended.

Why did EUR/USD fall back?

1) A hawk goes dovish: The President of the German Bundesbank said that German growth will be "much lower" than forecasts and that the ECB should be careful when normalizing monetary policy. Weidmann and German central bankers are hawks. Hearing a dovish statement from a conservative makes a difference. It weighed on the euro.

2) More worrying EZ data: Italy has officially entered a recession. Policymakers blamed the Chinese slowdown and promised a recovery later in the year, but the picture is gloomy. France grew by 0.3% in Q4, but only on top of a downward revision. And Germany suffered a plunge of 4.3% in retail sales in December. Exports suffer weaker Chinese demand, and domestic consumption is not making up the difference. 

3) End-of-month flows: After a sudden rush to sell the greenback following the dovish Fed decision, money managers needed a bit of balance as they finalized their portfolios at the end of January. Also, a bit of caution was also necessary ahead of the Non-Farm Payrolls.

NFP and other figures

The US jobs report is expected to show an increase of 165K positions in January, roughly half the gain seen in December, which was an excellent month. However, real expectations may be higher after the ADP NFP surprised to the upside. Wages are projected to advance by 0.3% MoM and 3.2% YoY, healthy figures. 

Upbeat numbers may push the Fed slightly away from the dovish side, but those expecting rate rises will need to be patient, as the Fed pledged patience.

See: Non-Farm Payrolls Preview: When the facts change so will the perception

In the old continent, inflation numbers are expected to show a deceleration in headline Consumer Price Index from 1.6% to 1.4% in January. Core CPI is forecast to remain unchanged at 1% in this preliminary release.

US-Chinese trade talks continue. China is reporting significant progress while US officials seem more skeptical. A meeting between US President Donald Trump and his Chinese counterpart Xi Jinping is on the cards for later this month.

EUR/USD Technical Analysis

EUR/USD is trading in a narrow range, capped by the pre-Fed highs of 1.1450 and supported by the daily lows around 1.1435. The Relative Strength Index is balanced at 50 once again after suffering from overbought conditions. Momentum is also flat. Euro/dollar is trading above the 50 and 200 Simple Moving Averages, but the general picture remains stable. 

The next line of resistance is at 1.1490, a peak from mid-January. 1.1515 was the post-Fed peak and serves as resistance. 1.1540 was a high point earlier in the year. 1.1570 is next.

On the downside, 1.1405 was a swing low late in January and coincides with the 50 SMA. 1.1390 was a swing low earlier. The 1.1340-1.1350 area provided support earlier in the month and 1.1310 served as a double-bottom in December.