- EUR/USD has been extending its gains as the low NFP expectations have hit the dollar hard.
- Only a "Goldilocks" jobs report can further pummel the dollar.
- Friday's four-hour chart is showing the currency pair is overbought.
The big day is here: Nonfarm Payrolls figures for August – critical for the Federal Reserve's taper decision – are set to be released and markets are holding their breaths.
While the current standstill is typical to pre-NFP Friday, currency markets were not quiet in the days leading to the event. The dollar tumbled down in response to weak leading indicators on Wednesday and extended its falls on Thursday – without additional triggers.
EUR/USD's 200+ pip move in recent weeks has not fully been the result of dollar weakness but of expectations that the European Central Bank would have to reduce its bond-buying scheme sooner rather than later. Eurozone inflation hit 3% YoY in August, emboldening ECB hawks. Europe ahead of the US in vaccinations.
Nevertheless, the main upside driver is dollar weakness, but the NFP could change it. The downbeat ADP labor figures – showing an increase of only 374,000 private-sector jobs – and contracting ISM Manufacturing Purchasing Manages' Index have caused some caution.
How will the EUR/USD react to the NFP?
1) Low bar, easier to cross, taper in play
While the economic calendar is pointing to an increase of 750,000 jobs in August, real estimates are under that level. ADP data and official statistics have often been at odds and the ISM figure is only for the smaller industrial sector. The bar could be too low.
A better-than-expected outcome could boost the greenback and send EUR/USD down on expectations that the Fed could still taper bond-buying later this month.
See NFP Preview: How low can the dollar go? Extremely low expectations point to a greenback comeback
2) Goldilocks – strong economy, no taper
An increase of 600-700K new positions would broadly meet lowered estimates and be a good result in absolute terms. If such an outcome is accompanied by a relatively modest increase in wages – projections stand at a repeat of July's 4% annual increase – it would be even better.
That would mean robust growth without pressing inflationary pressures, allowing the Fed to sit back and refrain from a "Septaper" while the economy keeps on growing. In this case, stocks would rise and the dollar would further suffer. The EUR/USD rally would continue.
See Nonfarm Payrolls August Preview: Sine qua non for the taper
3) Devastating figure, risk-off
Perhaps the services sector is doing even worse than the manufacturing one. The ISM Services PMI is due out 90 minutes after the jobs report and this timing meant fewer figures to chew on ahead of the NFP.
In case the US economy gained fewer than 600,000 positions last month, it could cause worries of a substantial US slowdown. A figure under 500,000 and a sharp increase in salaries would further paint a picture of stagflation – economic stagnation with fast price rises.
If the world's largest economy is having its issues, the global economy is in deeper trouble – and such a mood could send investors to the safety of the dollar.
See US August Nonfarm Payrolls Preview: Analyzing major pairs' reaction to NFP surprises
Overall, the chances of further EUR/USD gains seem lower than for a downside correction.
EUR/USD Technical Analysis
The Relative Strength Index (RSI) on the four-hour chart is above 70, thus reflecting overbought conditions and the potential for a pullback after the rally. Such a drop could be temporary, as other indicators are pointing to the upside. Momentum is upbeat and the pair broke above downtrend resistance earlier this week.
Resistance awaits at the daily high of 1.1885, followed by 1.1910, a peak seen five weeks ago. Further above, 1.1950 and 1.2015 are eyed.
Support is at 1.1860, which recently capped EUR/USD and earlier held the pair up. It is followed by 1.1835, a recent low, and then by 1.1810 and 1.1780.
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