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EUR/USD Head-and-Shoulders Unfolds Ahead of U.S. Non-Farm Payrolls (NFP)

EUR/USD Head-and-Shoulders Unfolds Ahead of U.S. Non-Farm Payrolls (NFP)

David Song, Strategist

EUR/USD holds a narrowing range as the Federal Reserve sticks to the sidelines ahead of its last meeting in December, but the pair stands at risk for a larger correction as a head-and-shoulders formation takes shape.

A marked rebound in U.S. Non-Farm Payrolls (NFP) may weigh on EUR/USD as it encourages the Federal Open Market Committee (FOMC) to deliver another rate-hike in 2017, and the exchange rate may exhibit a more bearish behavior over the coming months especially as the European Central Bank (ECB) plans to carry the quantitative easing (QE) program into 2018. However, market participants may pay increased attention to Average Hourly Earnings as Fed officials note ‘market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance,’ and a material slowdown in wage growth may generate a bearish reaction in the greenback as a growing number of Fed officials start to trim the longer-run forecast for the benchmark interest rate.

With that said, a batch of mixed U.S. data prints may continue to foster range-bound conditions for EUR/USD, but the downside targets remain on the radar for the exchange rate as both price and the Relative Strength Index (RSI) preserve the downward trends carried over from August.

EUR/USD Daily Chart

EUR/USD Daily Chart

A head-and-shoulders formation appears to be unfolding as EUR/USD breaks the neckline around 1.1670 (50% retracement) and clears the August-low (1.1662). Even though EUR/USD sits at channel support, a break/close below 1.1580 (100% expansion) raises the risk for a move back towards the Fibonacci overlap around 1.1480 (78.6% expansion) to 1.1500 (78.6% expansion), with the next downside hurdle coming in around 1.1390 (61.8% retracement) to 1.1400 (61.8% expansion).

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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