Talking Points:

- Bullish EUR/USD Behavior to Persist as RSI Pushes Into Overbought Territory.

- NZD/USD Risks Larger Recovery on Lackluster U.S. Non-Farm Payrolls (NFP) Report.

DailyFX TableEUR/USD

EUR/USD appears to be on track to test the September-high (1.2092) as it extends the advance from the previous week, but key data prints coming out of Europe may rattle the near-term rally in the exchange rate as the European Central Bank (ECB) struggles to achieve the 2% target for inflation.

Updates to the Euro-Zone Consumer Price Index (CPI) may produce a bearish reaction in EUR/USD as the headline reading is projected to slow to an annualized 1.4% from 1.5% in November, but a pickup in the core rate of inflation may keep the single-currency afloat as it encourages the ECB to move away from its easing-cycle.

Even though the Governing Council remains in no rush to remove the zero-interest rate policy (ZIRP), recent comments from ECB officials suggest the central bank will continue to change its tune in 2018 as Yves Mersch notes that the executive board must be ‘very careful not to act too timidly and too late and to fall behind the curve,’ while Benoit Coeure argues that ‘markets have to understand that QE will not last forever.’ Gradual changes to the forward guidance for monetary policy may fuel the appreciation in EUR/USD, with market participants likely to comb the ECB policy meeting minutes for clues as the central bank starts to wind down its asset-purchase program.

In turn, EUR/USD may continue to retrace the decline from back in 2014, with the topside targets on the radar especially as the bullish momentum appears to be gathering pace. After a string a failed attempts to break above 70, the Relative Strength Index (RSI) appears to be pushing into overbought territory for the first time since the summer months, with the yearly opening range in focus as a bull-flag formation appears to be panning out.Want to learn more about popular trading indicators and tools such as the RSI? Download and review the FREE DailyFX Advanced trading guides!

EUR/USD Daily Chart

EUR/USD Daily Chart
  • Topside targets remain on the radar for EUR/US as it clears the range from late-2017, with a break of the September-high (1.2092) raising the risk for a more meaningful run at the 1.2130 (50% retracement) hurdle as the recent developments in the RSI suggest the bullish momentum is gathering pace.
  • May see the former-resistance zone around 1.1960 (38.2% retracement) now offer support, with the next topside hurdle coming in around 1.2230 (50% retracement) followed by the Fibonacci overlap around 1.2320 (23.6% retracement) to 1.2370 (61.8% expansion).
NZD/USD

Fears of an inverting yield curve may continue to drag on the greenback, with NZD/USD at risk of extending the advance from the November-low (0.6780) should the slew of fresh U.S. data prints fail to boost expectations for an imminent Fed rate-hike.

Even though U.S. Non-Farm Payrolls (NFP) are projected to increase another 190K expansion in December, Average Hourly Earnings are expected to hold steady at an annualized 2.5% during the same period, with signs of subdued wage growth likely to dampen the appeal of the dollar as the Federal Open Market Committee (FOMC) notes ‘inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term.’

Fed Fund Futures

Lackluster developments coming out of the U.S. economy may continue to tame bets for an imminent rate-hike, with Fed Fund Futures currently pricing a less than 60% probability for a move at the next quarterly meeting in March, and limited expectations for higher borrowing-costs keeps the greenback vulnerable to further losses as the FOMC struggles to achieve its dual mandate. However, unlike its European counterpart, the longer-term outlook for the New Zealand dollar remains clouded with high uncertainty amid the government’s push to ‘review and revise’ the Reserve Bank of New Zealand’s (RBNZ) mandate. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

NZD/USD Daily Chart

NZD/USD Daily Chart
  • Waiting for a close above the 0.7110 (38.2% expansion) region, which lines up with the 200-Day SMA (0.7105), to open up the next topside hurdle around 0.7200 (38.2% retracement) to 0.7240 (61.8% retracement).
  • May see NZD/USD stage a larger recovery over the coming days as both price and the Relative Strength Index (RSI) threaten the bearish formations carried over from the summer months, with the oscillator at risk of clocking its first overbought reading since July.
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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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