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Post-NFP EUR/USD Strength Undermined by January Open Range

Post-NFP EUR/USD Strength Undermined by January Open Range

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD extends the advance following the US Non-Farm Payrolls (NFP) report, but the opening range for 2020 raises the scope for a further decline in the exchange rate as the near-term correction fails to produce a test of the August high (1.1250).

Post-NFP EUR/USD Strength Undermined by January Open Range

EUR/USD pared the decline from earlier this month as the US economy added 145K jobs in December versus forecasts for a 160K print, and the US Dollar may face additional headwinds as the lackluster data print puts pressure on the Federal Reserve to revisit its rate easing cycle.

A deeper look at the NFP report showed Average Weekly Earning unexpectedly narrowed to 2.9% from 3.1% during the same period, and the slowdown in household earnings may become a concern for the Federal Open Market Committee (FOMC) as it dampens the outlook for private sector consumption.

According to the FOMC Minutes, the committee “generally expected that consumption spending would likely remain on a firm footing, supported by strong labor market conditions, rising incomes, and solid consumer confidence,” but indications of a less robust economy may force the central bank to adjust the forward guidance for monetary policy as Chairman Jerome Powell insists that “if developments emerge that cause a material reassessment of our outlook, we would respond accordingly.”

In turn, Fed officials may project a lower trajectory for the benchmark interest rate when the central bank updates the Summary of Economic Projections (SEP) in March, but the FOMC may stick to the sideline at its first interest rate decision for 2020 as “participants regarded the current stance of monetary policy as likely to remain appropriate for a time as long as incoming information about the economy remained broadly consistent with the economic outlook.”

Image of Fed Fund futures

In fact, Fed Fund futures reflects a greater than 80% probability Chairman Powell and Co. will keep the benchmark interest rate in its current threshold of 1.50% to 1.75% on January 29, and the FOMC’s wait-and-see approach for monetary policy may rattle the near-term correction in EUR/USD as the European Central Bank (ECB) continues to expand its balance sheet by EUR 20B/month.

As a result, the EUR/USD advance following the NFP report may prove to be short-lived, with theopening range for 2020casting a bearish outlook for the exchange rate as the correction from the 2019 low (1.0879) fails to produce a run at the August high (1.1250).

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • The broader outlook for EUR/USD remains tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0879) in October.
  • Keep in mind, the monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with monthly high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
  • With that said, the opening range for 2020 casts a bearish outlook for EUR/USD and the correction from the 2019 low (1.0879) may continue to unravel amid the failed attempt to test the August high (1.1250).
  • The Relative Strength Index (RSI) highlight a similar dynamic as the oscillator snaps the bullish formation carried over from the previous month after failing to push into overbought territory.
  • Need a close below the 1.1100 (78.6% expansion) handle to open up the 1.1040 (61.8% expansion) region, with the next area of interest coming in around 1.0950 (100% expansion) to 1.0980 (78.6% retracement).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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