EUR/USD Forecast: Rally ready to return to its lane, NFP hint, Fed speakers eyed

The exchange rate matters – trivial for travelers and traders – but when a central banker says that, markets respond. Philip Lane, the European Central Bank's Chief Economist, said that his institution is watching currency valuations. 

While Lane's comments are far from hinting at any policy measure – nor intervention – they served as one spark to bring down EUR/USD from its peak. The ECB may be worried by August's downbeat inflation figures. The Consumer Price Index fell to negative territory on a yearly basis, while Core CPI tumbled to 0.4%. 

The world's most popular currency pair's ascent – topping 1.20 for the first time since 2018 – was mostly driven by the Federal Reserve. 

The Fed announced a dovish policy shift last week, striving for full employment at the expense of higher inflation, and the announcement continues reverberating through markets. Lael Brainard, Governor at the Federal Reserve, reiterated the message on Tuesday and said the bank will likely remain accommodative for some time. 

Nevertheless, a downside correction for the dollar was already cooking and it was also triggered by the upbeat ISM Manufacturing Purchasing Managers' Index. This forward-looking gauge for the industrial sector hit 56 points in August, the highest since 2018. On the other hand, the employment component remained below 50 – indicating weak hiring ahead of Friday's all-important Non-Farm Payrolls. 

Another hint toward the NFP is due out on Wednesday – ADP's private-sector jobs report. An increase of over one million positions is on the cards. It is essential to note that this publication has been off the mark in recent months. Models have apparently struggled to keep up with the rapid changes in the labor market brought on by the pandemic. Nevertheless, it is a substantial market mover.

See ADP Employment Change and Initial Jobless Claims Preview: Hope is not change

The Fed also remains close to the spotlight. Lauretta Mester, President of the Cleveland branch of the Federal Reserve, and John Williams, her colleague from New York, will speak later in the day. By reminding markets of the Fed's intention to keep rates low – estimated to run through 2025 by Goldman Sachs – the dollar could fall. 

COVID-19 cases continue rising in Europe while they are off the peak in the US. Investors are shrugging off these trends and focus on hopes for a vaccine. Anthony Fauci, America's top epidemiologist, said a vaccine could be approved before the end of the year if the results are overwhelmingly positive. 

Source: FT

Overall, there are reasons to worry about the European coronavirus situation and weak economics, but US struggles and the Fed's ultra-dovish moves may outweigh that and allow EUR/USD to resume its rise.

EUR/USD Technical Analysis

The Relative Strength Index ont he four-hour chart is back to the balanced ground – out of overbought conditions. Euro/dollar trades above the 50, 100, and 200 Simple Moving Averages and momentum remains positive. All in all, ingredients are in place for a resumption of the rally. 

The daily high of 1.1930 has been separating ranges and serves as the first resistance line. It is followed by 1.1965, the peak in mid-August. The fresh 2020 peak of 1.2010 is next. 

Strong support is at 11.880, that cushioned EUR/USD early in the week. It is followed by 1.1850, a stubborn resistance line last week. The next levels to watch are 1.18 and 1.1750. 

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