EUR/USD Forecast: ECB sends euro to critical support, break or bounce? US data holds the key

The recent rise in the euro is "always worrisome when you have weak demand" – the words of unnamed officials at the European Central Bank quoted in the Financial Times are weighing on the common currency. The market-moving story on the pink sheets of the FT joins comments by Philip Lane, the ECB's Chief Economist, who said the institution is "following" the exchange rate. 

EUR/USD has dipped below 1.18, completing a fall of over 200 pips from the 2020 peak of 1.2010. The common currency's climb was fueled by the Federal Reserve's dovish policy shift – striving for full employment at the expense of potentially overheating inflation. 

Will the ECB follow with its own "paradigm shift"? Christine Lagarde, President of the European Central Bank, announced a policy review when she assumed office in 2019. However, the Frankfurt-based institution has been busy with the coronavirus crisis and seemed to put that exercise on cold ice. 

Tension is mounting around the upcoming meeting of the bank next week, where Lagarde will likely be asked about the value of the euro and any policy measures to address its strength. 

While EUR/USD's slide early in the week can be partially attributed to a data-based dollar, recovery, the most recent prominent American indicator fell short of estimates. ADP's private-sector jobs report pointed to an increase of only 428,000 positions, far short of around one million expected. The data was somewhat dismissed by investors, as the firm has been off the mark in recent months. 

Thursday's figures are already of higher interest. Weekly initial jobless claims for the week ending August 24 are set to drop below one million once again, pointed to gradual improvement. More importantly, the ISM Services Purchasing Managers' Index is the last clue ahead of Friday's Non-Farm Payrolls report.

Economists expect a drop in the headline Services PMI and also a collapse in the employment component. Projections may be too downbeat, lowering the bar for an upside surprise. 

See ISM Services PMI Preview: Low bar opens door to (temporary) dollar bounce

Stock markets have been extending their uptrend, partially powered by hopes for a COVID-19 vaccine to come as early as next month in some US states. The urge to distribute the treatment raises concerns of political interfering ahead of the elections. Nevertheless, any positive development could boost equities and weigh on the safe-haven dollar. 

On the other hand, Washington announced movement limitations on Chinese diplomats, retaliating for a similar move by Beijing. Worsening relations between the world's largest economies could boost the greenback. 

Overall, the euro has reacted to the ECB's concerns, and that move may have reached its limits. US data is next to determine EUR/USD's direction.

EUR/USD Technical Analysis

Euro/dollar has paused just at the 200 Simple Moving Average on the four-hour chart. That indicator converges with an uptrend support line that has been accompanying the pair since mid-August. Break or bounce? 

The sharp turnaround has sent the Relative Strength Index from overbought conditions to the verge of oversold ones. On the other hand, momentum turned to the downside and the pair dropped below the 50 and 100 SMAs. 

Uptrend support is around 1.1780 at the time of writing. It is followed by 1.1750, a support line from late August, and then by the stubborn cap of 1.17. 

Resistance is at 1.1850, which held EUR/USD down last week and where the 100 SMA hits the price. The next levels to watch are 1.1880 and 1.925.