|

EUR/USD Forecast: 3 reasons for the Dollar Domination

  • The EUR/USD is trading below 1.1500, consolidating the falls.
  • The US Dollar is propelled higher by three factors related to each other.
  • The technical picture is bearish for the pair, with the "death cross" looming.

The EUR/USD is trading below 1.1500, the lowest levels in six weeks. The pair fell sharply on Wednesday on US Dollar strength stemming from three factors:

1) Excellent data

The ADP Non-Farm Payrolls report came out at 230,000 jobs gained in September, far above expectations and an upbeat figure in its own right. The publication serves as a hint towards the official NFP on Friday and raises expectations.

The ISM Non-Manufacturing PMI also beat early projections with a score of 61.6, the best level ever. The robust number implies a fast clip fo growth in the US services sector and also boosts expectations for Friday's NFP.

2) US bond yields break higher

The 10-year Treasury bond yield broke above the previous highs of 3.13% and hit a new peak at 3.23%. The sharpy movement is atypical. Yields of earlier maturities also moved higher. The higher levels make the US Dollar more attractive. This was mostly felt in the USD/JPY but the EUR/USD was also pressured lower by the move.

3) Powell's power play

Fed Chair Jerome Powell made his fourth public appearance in a week but this time was slightly different. The central banker explicitly said that monetary policy of the Federal Reserve may become tight, at least temporarily.

Some Fed officials want to stop when the rate reaches neutral but the man at the top opened the door to having interest rates above the level of inflation. Some speculate the Fed may even raise rates five times in 2019.

Elsewhere

Tensions around Italy are not as high as they used to be. The Italian government sticks to its plans to have a budget deficit of 2.4% in 2019, breaching EU rules. However, the coalition partners of the populist government agreed on lower deficits for 2020 and 2021, aiming to appease the European Commission. The Italian government is waiting for a verdict on its budget later this month.

Data in the euro-zone was somewhat disappointing with a drop of 0.2% in August. 

The economic calendar today is quite light, with only US Factory Orders worth a mention. Tension is mounting towards the all-important US Non-Farm Payrolls on Friday.

EUR/USD Technical Analysis

EUR USD technical analysis October 4 2018

The EUR/USD is trading well below the 50 and 200 Simple Moving Averages on the four-hour chart. The SMA50 is about to cross the SMA200, in what is known as the "death cross". On the other hand, the Relative Strength Index (RSI) is almost below 30, pointing to oversold conditions. 

Support awaits at 1.1460, the fresh low and a veteran line from 2015. Further down, 1.1395 was a swing low in August and 1.1365 was the initial level the pair dropped to in its collapse in the summer. 1.1300 is the 2018 low. 

Looking up, 1.1530 was a triple-bottom and now switches to resistance. 1.1565 supported the pair in September and 1.1595 was a swing high just before the recent drop. 1.1625 and 1.1680 are next up.

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

More from Yohay Elam
Share:

Editor's Picks

GBP/USD weakens to two-week lows near 1.3520

GBP/USD trades on the back foot, returning to the low 1.3500s, or two-week troughs, on Tuesday. Cable’s bearish price action follows decent gains in the Greenback at the time when investors assess latest US data releases and the persistent uncertainty in the US-Iran crisis.

EUR/USD remains offered; breaks below 1.1600

EUR/USD now accelerates its daily correction, breaching below the key 1.1600 support level on Tuesday. The pair’s daily correction comes on the back of a decent bounce in the US Dollar despite disappointing US data releases and amid persistent geopolitical concerns.

Gold bears eye $4,300 breakdown amid Fed hike bets, Iran risks, firm USD

Gold languishes near a two-and-a-half-week low, touched during the Asian session on Wednesday, awaiting a break below $4,300 before the next leg down. Escalating US-Iran tensions lift oil prices to a nearly six-week high and fuel inflation fears, reaffirming Fed rate-hike bets. This acts as a tailwind for the safe-haven US Dollar and undermines demand for the non-yielding bullion.

RBNZ set to raise interest rate to 2.75%
The Reserve Bank of New Zealand (RBNZ) is on track to deliver a follow-through interest rate hike, raising the Official Cash Rate (OCR) by another 25 basis points (bps) from 2.50% to 2.75% on Wednesday. Experts expect a consensus decision this week, unlike a deeply divided outcome predicted during the July monetary policy meeting.
Global bond market sell off haunts markets

Global sovereign bonds are selling off as we start a new month. The UK is, unsurprisingly, taking the biggest hit. Two and 10-year yields rose by 10 basis points at one point on Tuesday, and are currently higher by 7 and 8bps respectively.

Diesel’s record $100 warning: The oil shock hiding in plain sight

The Oil market may look calmer than it did a few months ago, but diesel is sending a very different message. The US diesel crack spread, the premium of ultra-low sulphur diesel futures over WTI, recently surged above $100 per barrel for the first time, reaching an intraday record of just over $102.00.