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Jignesh Davda

EUR/USD Sellers Defend 20-Day Moving Average

A string of disappointing US data has triggered a recovery in EUR/USD leading to a one-week high yesterday. The pair extended gains on Thursday after disappointing data from the Institute for Supply Management (ISM).

Thursday’s data reflects a survey of purchasing managers not taking into account the manufacturing industry. The ISM’s index came in at 52.6 which was well below the analyst estimate of 55.1 and a prior reading of 56.4.

Earlier in the week, the ISM’s manufacturing PMI fell to a 10-year low. Further, the ADP’s jobs report came in a bit softer than expected, and to make matters worse, the jobs gain for the prior month was revised down.

The poor US data throughout the weak sets a low bar for the jobs report which tends to have a big impact on the markets. Further, the report usually precipitates speculation on what the Federal Reserve will do next. In this case, the markets will likely look at a weak report as a signal that the central bank will cut rates again fairly soon.


US Jobs Report to Set the Tone for EUR/USD

I have a somewhat contrarian view ahead of the data release. Indeed, the data this week has not been good but there are a few things that lead me to believe the report won’t cause an adverse reaction in the markets.

For starters, the average hourly component of the report has come in surprisingly strong as of late. It came in ahead of expectations in the last two readings and was revised up in the two before that. This suggests increasing demand for workers.

The analyst estimate has been set for 145,000 more jobs in September which is slightly higher than the last reading. This also provides some confidence that the jobs report might not follow the trend of gloomy economic reports this week.

Lastly, I think the market reaction to yesterday’s report is important. This is more noticeable in the equity markets than in the dollar. The markets did sell-off on the poor non-manufacturing report, however, recovered to close the day in the green, showing signs of a potential near-term bottom. Similar price action is seen in EUR/USD although not as abrupt as with equities.

For these reasons, I’m speculating that the dollar might be nearing a bottom. Of course, anything can happen and the jobs report will ultimately set the tone.

Technical Analysis

The technical outlook for EUR/USD also supports the idea that the recovery that’s taken place this week might be near an end.

EURUSD Daily Chart

Yesterday, the rally was blocked by the 20-day moving average as well as horizontal resistance from the psychological 1.1000 handle.

Further, there is resistance from the upper bound of a declining trend channel that has contained EUR/USD since late June.

Unless the pair closes above 1.1000 at the end of today’s session, there is potential for a reversal to take place in this area.

Bottom Line

  • The EUR/USD recovery this week is losing momentum as it trades near a major resistance confluence.
  • Today’s US jobs report will ultimately set the tone for the pair.
  • A daily close below 1.1000 could trigger a reversal, in line with the broader downtrend.
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