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EUR/USD Breaks 2014 Trend, RSI Approaches Overbought Ahead of NFP

EUR/USD Breaks 2014 Trend, RSI Approaches Overbought Ahead of NFP

2016-02-05 08:00:00
David Song, Shuyang Ren,
Share:

- U.S. Non-Farm Payrolls (NFP) to Expand Below 200K for First Time Since September.

- Average Hourly Earnings to Slow to Annualized 2.2% From 2.5% in December.

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Trading the News: U.S. Non-Farm Payrolls

Another 190K expansion in Non-Farm Payrolls (NFP) may boost the appeal of the greenback as the U.S. economy approaches ‘full-employment,’ but a marked slowdown in wage growth may fuel the near-term rally in EUR/USD as it dampens bets for a Fed rate-hike in the first-half of 2016.

What’s Expected:

EUR/USD NFP

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though the Federal Open Market Committee (FOMC) appears to be on course to implement higher borrowing-costs over the coming months, the disinflationary environment across the major industrialized economies may keep the Fed on the sidelines for most of the year as central bank officials look for greater evidence of achieving the 2% target for price growth.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

ADP Employment (JAN)

195K

205K

New Home Sales (MoM) (DEC)

2.0%

10.8%

NFIB Small Business Optimism (DEC)

95.0

95.2

The pickup in business confidence accompanied by the expansion in the housing market may encourage a stronger-than-expected NFP report, and a further improvement in the labor market may put increased pressure on the Fed to implement a higher interest rate especially as the region heads towards the natural rate of unemployment.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Challenger Job Cuts (YoY) (JAN)

--

41.6%

Durable Goods Orders (DEC F)

-4.5%

-5.0%

Advance Retail Sales (MoM) (DEC)

-0.1%

-0.1%

However, the persistent slack in private-sector consumption paired with the rise in planned job-cuts may drag on employment, and a soft labor report along with a marked slowdown in wage growth may spark a further depreciation in the dollar as market participants push out bets for the next Fed rate-hike.

How To Trade This Event Risk(Video)

Bullish USD Trade: NFP Climbs 190K+, Hourly Earnings Highlight Sticky Wage Growth

  • Need red, five-minute candle following the NFP print to consider a short trade on EUR/USD.
  • If market reaction favors a bullish dollar trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit.

Bearish USD Trade: U.S Employment Report Fails to Meet Market Forecast

  • Need green, five-minute candle to favor a long EUR/USD trade.
  • Implement same setup as the bullish dollar trade, just in the opposite direction.

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Even though the diverging paths for monetary policy casts a long-term bearish outlook for EUR/USD, the pair may test the broad range from the previous year as it appears to be breaking out of the downward trend carried over from the end of 2014; will keep a close eye on the Relative Strength Index (RSI) as it approaches overbought territory, with a break above 70 highlighting the risk for a further advance in the exchange rate.
  • The DailyFX Speculative Sentiment Index (SSI) shows retail crowd remains net-short EUR/USD since February 1, but the ratio continues to hold near recent extremes as it currently sits at -2.04, with only 33% of traders long.
  • Interim Resistance: 1.1510 (50% retracement) to 1.1520 (61.8% expansion)
  • Interim Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)

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Impact that the U.S. Non-Farm Payrolls report has had on EUR/USD during the previous month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

DEC 2015

01/08/2015 13:30 GMT

200K

292K

+18

+63

December 2015 U.S. Non-Farm Payrolls

EUR/USD Chart

The U.S. Non-Farm Payrolls report largely exceeded the estimate in December, with the economy adding another 292K, following a revised 252K expansion the month prior. Moreover, the Unemployment Rate held steady at an annualized 5.0% even though the Labor Force Participation Rate unexpectedly increased to 62.6% from 62.5%, while Average Hourly Earnings fell short of market expectations as the figure climbed 2.5% amid projections for a 2.7% print. Nevertheless, the ongoing improvement in the labor market may keep the Fed on course to further normalize monetary policy in 2016 especially as the U.S. economy approaches ‘full-employment.’ Despite the better-than-expected prints, the initial bullish reaction in the greenback was short-lived, with EUR/USD grinding higher throughout the North American session to close the day at 1.0918.

Read More:

USD/CAD Approaches Key Support Ahead of NFP- Buy Dips or Sell Rips?

USD/JPY – Claw Back

USD/JPY-Don’t Forget about the 26 Year Trendline

COT-Big Increase in Net Long Position for Crude Oil Trend Followers

--- Written by David Song, Currency Analyst and Shuyang Ren

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

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