What's under the hood of EUR/USD as we move into 4th July holidays/Nonfarm Payrolls?

  • EUR/USD starting to consolidate as we head onto 4th July holidays
  • The focus in the immediate term is Nonfarm Payrolls and the Fed.
  • There is plenty under the hood of EUR/USD which is keeping a lid on rallies and capping the downside also.

EUR/USD is currently trading at 1.1281 having fallen between 1.1268 and 1.1312, down -0.03% on the day at the time of writing. Stronger than expected EZ PMI's have been shrugged off and the Dollar has picked up, rising by the same margin as the euro, +0.03%. There is plenty going on in the background here, but we are moving into the 4th July holidays and traders will be prudent to take anything off the table ahead of Nonfarm Payrolls on Friday.

Meanwhile, the backdrop to the FX space is becoming more colourful by the day and there are a number of fundamentals at play that technicians should certainly think twice about ignoring. Geopolitics is a driving force and making for choppy conditions, even in the most trend-like currency pairs. For EUR/USD, we have just got the news of a new head to the ECB to replace Draghi at the end of October, (subject to parliamentary confirmation). This was seen as a more dovish alternative to the Bundesbank's Weidmann, who has been the leader of the hawks on the ECB council. The nomination of Christine Madeleine Odette Lagarde is a French lawyer and politician serving as Managing Director and Chairwoman of the International Monetary Fund since 2011, seems to be a political move given her background, and it comes at a time when the Eurozone project is under immense scrutiny while monetary policy is heading into a new easing cycle, pressuring the euro down from its Jan 2018 highs. If it were not for equal expectations that the Federal Reserve is on the brink of cutting interest rates, the euro would be lower, perhaps even below 1.10 and on its way towards the prior bearish cycle territories around 1.05. 

What is under the hood?

Meanwhile, trade wars and heightened tensions on a geopolitical scale are also factors that will likely keep investors sidelined, meaning that flows away from, say, the DAX, and into the safe havens, such as the Yen, exposes the downside in EMs, the Euro and the EUR/JPY cross. The Trump administration has threatened to impose more tariffs on the European Union, a lumpy $4 billion worth, which is the latest escalation in a 15-year battle over aviation subsidies. This comes at a time when Brexit is underway and under a bleak outlook for the EZ economy which is a worrying backdrop for Lagard and her new team of policymakers at the European Central Bank to step into towards the end of this year where they will be under pressure to support growth.

Today, we have seen that eurozone business activity picked up slightly last month but remained weak as a modest upturn in the services industry offset a continued deep downturn in factory output - The euro was unable to carry anything forward from the Services PMIs in Euroland as too much negative sentiment weighs. Indeed, these extra $4 billion in tariffs and the EU’s likely future retaliation will likely make trade tensions between these two allies worse and markets are on guard. 

Also, but not least, Trump is not happy with China, nor Europe, over currency manipulation which is likely going to keep markets busy, (EUR/USD on edge), as the trade wars now seem nowhere closer to a resolve since the ceasefire agreement made last weekend on the sidelines of the G20. In a tweet earlier today, Trump accused China and Europe of “playing big currency manipulation game and pumping money into their system in order to compete with USA.”

“We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games -- as they have for many years!”

Analysts at Westpac said that they see scope for EUR/USD to dip lower on a 1 to 3-month view before edging up. "Additionally, slowing world growth and geopolitical risks are likely to stymie appetite for risky emerging-market assets.  As long as confidence in EM is shaky, there is a good reason to expect the USD to find solid support," the analysts said, adding, "That said, the outlook for the greenback is complicated by a number of other factors.  Firstly other major central banks are also pursuing accommodative policy settings.  This should dilute the impact of lower Fed rates on the USD. "

Key notes:

Nonfarm payrolls

The Bureau of Labor Statistics (BLS) a division of the US Labor Department will issue its Employment Situation Report for June on Friday July 5th, at 8:30 am EDT, 12:30 pm GMT. The data are expected to rise 160,000 in June following a 75,000 gain in May. However, markets are getting set for the possibility of a deterioration in the sector which might just swing a rate cut this Federal Open Market Committee around and provide a buffer to EUR/USD.

"The appearance of two very weak payroll reports coupled with similar poor numbers from ADP would seem to indicate that more than statistical chance is at work.  Economic growth has shifted lower in the second quarter. The US/China trade dispute, the source of so much business angst does not seem to be headed for resolution anytime soon.  In fact given the situation, it would be remarkable if there was no impact on the labor market."

- Joseph Trevisani, Senior analyst at FXStreet argued.

EUR/USD levels

Analysts at Commerzbank explained that EUR/USD continues to ease back from the 1.1411 55 week-moving-average:

"The Elliott wave count is suggesting a retracement into the 1.1265/30 band and beyond this we look for recovery and further gains. Above 1.1412 (last weeks high) we look for a test of the 1.1570 2019 high. Slightly longer term we target 1.1815/54 (highs from June and September 2018). Initial support lies at 1.1264/13th May high, ahead of 1.1176 the 7 th March high, which we look to hold."

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