Friday’s strong US non-farm payrolls signaled the Federal Reserve would stick with its tightening plans for the rest of this year.
The EUR/USD thus dropped to 1.1379 on Friday before leaving higher lows along the upward sloping 1-hour 50-MA. The spot moved above 1.14 handle in Asia, but further gains were hard to come.
EUR to remain bid on hawkish ECB
Friday’s payrolls report boosted the odds of a rate hike in December. It is also being speculated that the Fed would begin unwinding its balance sheet in September. Still, sharp gains in the USD are unlikely given the Fed tightening is an old story, when compared to the recent hawkish twist by the ECB.
Investors fear an early ECB QE taper as Draghi & Co. believe reflationary forces have replaced deflationary ones in the Euro area. Moreover, the QE Taper is more of a technical necessity rather than an economic choice… this is something markets seem to have realized after last week’s ECB data showed the central bank fell short of its target purchases of German bonds for the third straight month in June.
Hawkish ECB could buffer EUR against uptick in US rate hike odds. Thus, traders should watch out for narrowing of the US-German yield spread. German trade balance data due at 6:00 GMT will have more of a geopolitical importance as record high German surplus is a bone of contention between Trump administration and Chancellor Merkel.
EUR/USD Technical Levels
A close below 50-MA (1.1398) on the 1-hour would mark an end of the rising lows formation and open doors for 1.1374 (1-hour 100-MA), under which a major support is seen at 1.1312 (July 5 low). On the other hand, rebound from 1.1385 (5-DMA + 10-DMA) if followed by a break above 1.1446 (June high) would expose resistance at 1.1495 (Oct 2015 high) and 1.1534 (end Jan 2015 high).
Note - The weekly RSI is close to being overbought and is at the highest level since April 2011.
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