EUR/USD bears are moving in with eyes on a significant downside extension

EUR/USD is flat at the start of the week following Friday's sell-off from the 1.0250s that reached a low of 1.0141. The move came from a blockbuster US Nonfarm Payrolls report.

The US employment report showed a 528,000 gain in payrolls for July, beating estimates for an increase of 250,000, compared with the 398,000 increase in June. On top of that, the Unemployment Rate fell to 3.5% vs. estimates of 3.6%. Additionally, average hourly earnings were up 0.5%, stronger than an upward revised 0.4% increase in June, keeping the adjusted year-over-year rate at 5.2% compared with expectations for a slowdown to 4.9%. Overall, this leaves the Unemployment Rate back to its pre-pandemic low while hourly earnings are surging. Markets are therefore revising their Federal Reserve bets higher with sharper odds of a 75bp Fed hike.

''The upside surprise reaffirms that a Fed dovish pivot is premature and that the USD will be hard to beat,'' analysts at TD Securities said. ''While we are wary of price action on a summer Friday, USDJPY should be trading with a 136-handle while EURUSD will continue to languish in the shadow of the Fed and energy crisis.''

Meanwhile, in domestic politics, Mario Draghi’s exit as Italy PM has left an ambitious reform programme unfinished for which analysts at Rabobank argue questions whether the country will be able to unlock access to EUR 800 bln from the EU’s Covid recovery fund. 

''Delays in both the reform programme and in access to these funds, at a time with the Eurozone is facing recession, bode poorly for investor confidence in peripheral debt. In turn, this is likely to be a test both for the European Central Bank and the EUR. We see a strong risk that EUR/USD could move as low as 0.95 in the weeks ahead.''

For the week ahead, US and German inflation data will be important with the major focus on the US Consumer Price Index. Core prices likely stayed strong in July, with the series registering a 0.5% MoM gain. 

EUR/USD technical analysis

The price on the weekly chart has corrected to a 50% mean reversion of the prior weekly sell-off. Last week's sell-off could be the start of the bearish extension. A break of 1.00965 will be important: