EUR/USD supported at critical 61.8% golden ratio

• EUR/USD bulls are on the lookout for an upside daily extension.
• EUR/USD is supported at the 61.8% ratio as US CPI looms. 

EUR/USD was ending the week on the backfoot in a sudden burst of energy in US yields and the greenback once again as risk sentiment soured. EUR/USD finished lower by 0.13% and on the verge of losing the 1.18 area. The single currency fell from a high of 1.1851 to score a low of 1.1808.  

EUR/USD  has, however, held support, as illustrated below, but the week ahead could be critical in this regard given the week's left until the Federal Reserve meeting, 21-22 Sep. The data will be critical and all eyes will be on the US Consumer Price Index and weekly Jobless Claims. 

The September European Central Bank meeting has policymakers finally reduced the pace of asset purchases, albeit modestly. Nevertheless, it has given the euro a backbone that had largely been priced in by the market, so there was no material benefit on the day. Going forward, comparisons will be made between the eurozone and US economic performance as a guide towards tapering sentiment.

As it stands, however, the central banks are not poles apart on the dovish side. The Fed's chairman, Jerome Powell, and some less hawkish members of the FOMC need to see a significant move towards their maximum employment objective. Meanwhile, at the ECB, markets appear to be reasonably reluctant to see last week’s move as the first step in a sustained policy-normalisation path.

There are no clear data drivers in the Eurozone this coming week, which leaves the emphasis on the US calendar as we enter the Fed's blackout period. it was evident from the reaction to the dismal headline Nonfarm Payrolls data that the markets are more concerned about upward pressure on wages than the softness of employment. So, CPI will definitely be on the list rs risk events for EUR/USD.

However, recent Fed communication has not diverged from the view that inflationary pressures have a transitory nature, so unless CPI is a significant surprise to the upside, the US dollar may fail to benefit from the data. In fact, while the analysts at TD Securities expect that food and energy prices probably rose fairly strongly again in August, they see the core CPI likely rising at its slowest pace since February. 

Meanwhile, the US labour market and risk-off coronavirus themes could be the ticket for continued strength in the US dollar. Last week's Jobless Claims pointed to a tightening labour market even though total employment remains well below the pre-pandemic level.

EUR/USD technical analysis

The price is supported at the 61.8% Fibonacci retracement and could be on the verge of a move to the upside to test prior highs for the possibility of an upside extension in the coming days.

Failures to break higher and a subsequent break of the 26 Aug structure will open risk to 1.1680.