EUR/USD Rate (EUR/USD) Unlikely to Cede Support at 1.11

The Euro has edged higher against the US Dollar at the start of the new week as a base to the August declines is cemented.

The EUR/USD pair had been falling after investors started gaining renewed confidence in the dollar, following some positive sets of data which put another Fed interest rate hike back on the agenda.

However, the pair soon found robust support at around the 1.1100 level where two major moving averages -  the 50-day and 200-day – have merged and provided strong underpinning support:

We do not expect the supports to be broken easily.

This makes further upside seem the more likely result, perhaps, with a move back up to 1.1300 as a possibility. 

We are however far from making a conviction call for EUR/USD, which remains in a very long, multi-year, range-bound phase, in which directionality is difficult to determine.

Indeed, opinion on the pair is split with analyst Yann Quelenn of broker Swissquote arguing, “the short-term technical structure suggests further weakening, the road is wide-open for further decline.”

He does however note support at 1.1047 which would need to be broken to validate his argument for lower rates.

Therefore, watching the various supports appears to be the big theme on calling the EUR/USD this week.

ECB Policy meeting in focus

The ECB meeting on Thursday is most significant data release for the week ahead.

Most analysts do not expect more stimulus in September despite the recent set of inflation figures which showed a slowdown in inflation from 0.9% to 0.8% in July.

“The European Central Bank's monetary policy announcement is the most important event risk next week. While no immediate changes in monetary policy is expected, ECB President Draghi is expected to remind investors that inflation is low, the economy is weak and easier monetary policy may be needed,” says BK Asset Management’s Kathy Lien.

Elsewhere analysts at TD Securities echoe Lien’s sentiments:

“While we look for the ECB to ease further before the end of the year, we don’t think that it’s going to happen in September, which should lead to an initial hawkish market reaction with the 12:45pm BST rate decision. However, we do think that President Draghi will say enough during the opening statement and press conference to suggest that a QE extension at the very least is on the way”. 

For the US dollar the main focus in the week ahead will be how Fed officials respond to the recent Non-Farm Payrolls release.

San Francisco Fed’s Williams is first up to discuss his views on policy, with analysts looking for a possible shift in stance as a result of NFPs.

It is not clear how the market took the NFP undershoot as the dollar actually rose in several pairs – such as versus the yen but fell versus the stronger pound.

Also, whilst the data led to a fall in the probability of the Fed raising interest rates in September, it increased the chances of a

December hike from 42% to 44% for 0.25% alone and over 50% for 0.25% hike or more.

In terms of new data in the week ahead, the main focus will be ISM Non-Manufacturing PMI, which is expected to remain at 55.5 in the month of August, and is seen as more likely to surprise to the upside than downside, by Nordea Bank.

Also out is the Fed’s economic analysis called the ‘Beige Book’; of this analysts at TD Securities said:  

“We expect the tone of the report to underscore the relatively subdued economic backdrop, as the upbeat assessment on labor market and consumer spending activity should be partially offset by the continued weakness in business capital investment activity and intentions.”