EUR/USD Forecast: not the time to put all eggs in the same basket

  • Mid-term elections and a Federal Reserve meeting to rock the boat.
  • EUR/USD bouncing from yearly low, recovery could continue the next days.

Dollar's dominant strength took a sudden turn to the worse this past Thursday, with the EUR/USD pair advancing up to 1.1455, after flirting with the year low of 1.1300 mid-week. Risk aversion dominated financial boards, turning all of a sudden on headlines indicating that UK PM's May announced they were getting a deal on financial services with the EU. The Pound soared, dragging high-yielding currencies and stocks alongside. Despite the news was later denied, the dollar remained under pressure amid soft local data and persistent momentum among equities.

The scenario repeated itself with the trade-war soap opera. US President Donald Trump made a couple of statements ahead of next week mid-term elections that sent risk appetite up-roaring. First, he tweeted that in "a long and very good conversation with President Xi Jinping of China," trade discussion went along nicely, giving hopes of a breakout in the trade war between the two countries. The appetite for risk was exacerbated early Friday, with news indicating that US Trump has asked his Cabinet to prepare a possible draft of a trade deal with China. The G-20 meeting is taking place later this month in Argentina, and Trump hinted an agreement may be seal then. The news was also denied by a CNBC's journalist, who said that a senior administration official told him that there's a long way to go on negotiations.

Mid-term elections will take place next November 6th. Many market players are wondering home much of this statements are part of a political strategy to boost equities ahead of them. Not the time to put all eggs in the same basket.

The greenback found some support on Friday as equities began easing following the latest denial of a possible deal between the US and China. The Nonfarm Payroll report released alongside, did little for the USD, despite posting an impressive headline. According to the official release, the US economy added 250K new jobs, largely beating the 190K expected, while the unemployment rate remained steady at 49-year lows of 3.7%. Wages posted an impressive 3.1% increase, the highest reading since 2009, but given that it matched the market's forecast, there was no surprise there.

Data throughout the week was generally discouraging as the final versions of October Manufacturing PMI came in below expected. Manufacturing growth in the EU fell to a 26-month low according to Markit, with the index printing 52.0 down from 53.2 in September. EU preliminary Q3 GDP came in at 0.2%, half the 0.4% forecasted, another sign of soft growth. The only encouraging number from the Union was German inflation, steady above 2.0% YoY. In the US the official ISM Manufacturing  PMI came in at 57.7 for October, down from 59.8 in September, and printing the lowest reading in six months. The Markit Manufacturing PMI was a bit more encouraging, resulting at 55.7, below the preliminary estimate of 55.9 but above the previous 55.6.

After mid-term elections', the next most relevant event will be a Federal Reserve monetary policy meeting, although policymakers aren't expected to take action, and there won't be fresh forecasts or a press conference afterward.  

EUR/USD technical outlook

The EUR/USD pair has stabilized around the 23.6% retracement of the September/October decline, also around a former relevant low, the 1.1430 level. The recovery then, seems a mere correction, despite is quite relevant the fact that the pair bounced after failing to pierce its yearly low.

Long-term technical readings keep the risk skewed to the downside, as in the weekly chart, technical indicators remain within negative levels, without directional strength. In the same chart, the pair is developing below the 20 and 100 SMA, bouncing from the 200 SMA, currently at 1.1310. In the daily chart, the pair met sellers Friday around a strongly bearish 20 DMA, which maintains its downward slope well below the larger ones. Technical indicators have bounced from oversold levels, still heading north well below their midlines, indicating unconvinced bulls.

An immediate support comes at 1.1360, followed by the mentioned yearly low. Should 1.1300 give up, the next strong support comes at 1.1260, while once this last is cleared, 1.1140 comes as the next possible bearish target. Gains beyond 1.1460 are now required to see the upside building up, with 1.1520 and 1.1600 as the next possible bullish targets.

EUR/USD sentiment poll

The FXStreet Forecast Poll shows that sentiment has flipped against the greenback. In the weekly view, bulls jumped from 30% last week, to 56% this one, while the average target has been upgraded roughly 100 pips to 1.1435. The number of bulls has increased also in the monthly view,  although in the quarterly perspective decreased from 62%  to 54% while the average target is higher, from 1.1460 to 1.1524. In this last time frame, the Overview chart shows that the largest accumulation of targets is well above the current level, around 1.1800. The moving averages in the three time-frame under study offer modest bullish slopes, in line with a better performance of the common currency ahead.

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