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EUR/USD Risks Larger Advance as String of Lower-Highs Snap

EUR/USD Risks Larger Advance as String of Lower-Highs Snap

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EUR/USD trades on a firmer footing even as the Euro-Zone Retail Sales report reveals a 0.2% decline in July, and recent price action warns of a larger advance as the exchange rate snaps the string of lower-highs carried over from the previous week.

The recent pullback in EUR/USD may continue to unravel ahead of the U.S. Non-Farm Payrolls (NFP) report as there appears to be a broader shift in market behavior, with euro-dollar at risk of making another run at the July-high (1.1791) as it bounces back from the monthly-low (1.1530). Keep in mind, a 195K expansion in U.S. employment may do little to alter the monetary policy outlook as Average Hourly Earnings are anticipated to hold steady at 2.7% in August, and signs of limited wage growth may produce headwinds for the dollar as it casts doubts for four Fed rate-hikes in 2018.

Image of fed fund futures

With the Federal Open Market Committee (FOMC) widely expected to increase the benchmark interest rate later this month, the updated Summary of Economic Projections (SEP) is likely to take center stage as ‘many participants noted that it would likely be appropriate in the not-too-distant future to revise the Committee's characterization of the stance of monetary policy in its postmeeting statement.’ It seems as though the Fed will continue to adjust the forward-guidance for monetary policy as the central bank larger achieves its dual mandate for full-employment and price stability, but the FOMC may opt for a dovish rate-hike on September 26 as ‘participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment.’

In turn, ongoing projections for neutral Fed Funds rate of 2.75% to 3.00% may fuel a more meaningful shift in EUR/USD behavior, with the exchange rate at risk of extending the recovery from the 2018-low (1.1301) especially as Chairman Jerome Powell talks down the risk for above-target inflation. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

EUR/USD Daily Chart

Image of eurusd daily chart

There appears to be a broader shift in EUR/USD behavior as bothprice and Relative Strength Index (RSI) threaten the bearish trends from earlier this year, with a move back above the 1.1640 (23.6% expansion) to 1.1680 (50% retracement) region raise the risk for a move back towards 1.1810 (61.8% retracement), which largely lines up with the July-high (1.1791). Need a closing price above the stated region to open up the topside targets, with the next region of interest coming in around 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion).

For more in-depth analysis, check out the Q3 Forecast for the Euro

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.