EUR/USD Forecast: Surfing the trade war and central banks' waves
- Trade war and central banks' imbalances joined forces in benefit of the USD.
- EUR/USD mixed sentiment, but lower targets suggest that bears will stand victorious.
These days, multiple central banks announced their latest monetary policy decisions, and one thing is clear: the Fed is way ahead of the rest of them, with the market reacting accordingly and jumping into the greenback. Things, however, are not always that easy. Trade war headlines also rocked the boat, as US President Trump directed his team to study imposing higher tariffs of 25% instead of 10% on $200B worth of Chinese imports last Wednesday. Equities reacted negatively to the announcement and risk-aversion took over financial markets but lasted little. China took up to Friday to respond, announcing it will slap tariffs on $60B in US goods, with charges ranging from 5% to 25%, focused on agricultural-related goods. Additionally, the PBoC adjusted the reserve requirement on FX forwards trading to 20% effective August 6th.
The announcement, which came right ahead of the release of the US Nonfarm Payroll report, triggered a dollar's decline that benefited mostly commodity-linked currency. The EUR/USD peaked at 1.1610, holding nearby with mixed US employment data, as the economy added 157K new jobs in July, missing expectations, while the unemployment rate decreased as expected to 3.9%. Previous month header, however, suffered a strong upward revision to 248K, while wages matched the market's expectations. Even further, US Services PMI suffered downward revisions, with the Markit PMI index down to 56 from a previous estimate of 56.2, and the official ISM Non-Manufacturing PMI resulting at 55.7 well below June's reading of 59.1 and the expected 58.6.
The dollar remained strong anyway.
The US Federal Reserve held a "non-live" monetary policy meeting, keeping rates on hold and adding minor, but hawkish twists to the wording on the statement in relation to economic developments. Policymakers believe that the economy is growing at a "strong" pace, reaffirming their plans to gradually hike rates. A September rate hike is now priced in, with odds of such move now above 90%.
The BOJ and the BOE, among other central banks, also had monetary policy meetings, with the first maintaining the status quo and reaffirming that monetary policy will remain accommodative until inflation reaches 2.0%, and the second offering the first real rate hike since the financial crisis but combined with a doom perspective. None of them is close to considering trimming QE, as it's neither the ECB according to their latest statement. The advantage is all o the Fed.
Next week, the calendar will be much lighter, with no first-tier events in Europe or the US. The most relevant headline will be US inflation to be out next Friday, with the core yearly reading seen at 2.3%.
EUR/USD technical outlook
The EUR/USD pair is little changed this Friday, but below the 1.1600 level. Late Thursday, it broke below a daily ascendant trend line coming from the yearly low at 1.1507, completing a pullback to it on early Friday's turmoil, but still below the level, and close to its yearly low. In the weekly chart, the negative bias is still clear, as the 20 SMA continue gaining downward traction far above the current level, and, despite the Momentum indicator remains directionless, the RSI also turned south, currently at 37.
In the daily chart, and after almost three weeks hovering around it, the pair finally accelerated lower below its 20 DMA, while the 100 DMA maintains a strong bearish slope, now at around 1.1820. Technical indicators in this last chart are flat in negative levels, after a failed attempt earlier this week to re-enter positive ground.
Bears are on the driver' seat, despite cautions. Supports from here come at 1.1550 and the 1.1500 region, while below this last, 1.1440/60 is the next probable bullish target. The market will need a huge catalyst to break below this last price zone, but if it does, speculative interest may attempt to push it some 200 lower. The 1.1620 region is the immediate resistance, followed by a stronger one around 1.1720, the 23.6% retracement of the latest daily slump. Selling interest has been quite strong on attempts to break above it, and this situation will likely persist.
EUR/USD sentiment poll
The FXStreet Forecast Poll shows that bears account for 71% weekly basis, a nice increase from the previous 63%, with the average target downgraded to 1.1549 from 1.1608. In the monthly view, bulls are now a majority of 43%, barely above 39% previously, with an increase of those unable to see a clear future in the 3-month view, with 49% of the polled experts seeing the pair sideways.
The overview chart, however, shows something quite different: the moving averages for the three time-frames under study gain downward strength, even despite the large accumulation of higher possible levels in the monthly view. Bears seem decided despite certain cautious linked to trade-war uncertainty.
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Author
Valeria Bednarik
FXStreet
Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.
