EURUSD, GBPUSD, USDJPY
Weekly Forex Analysis
(September 07 - September 11, 2020)
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US Dollar Fundamental Outlook: ISM and Unemployment Rate Surprises Fuel USD Rebound
The dollar firmed last week on the back of positive US economic data. The rebound started on the healthy ISM manufacturing (56.0 vs. 54.6 upside surprise) and ISM services indexes (56.9 - in line with forecasts). The dollar then extended the move higher Friday on the significant drop in the unemployment rate (8.4% vs. 9.8% consensus forecasts), though it gave up most of these gains by the close.
The week ahead is relatively quiet on the economic front, with only the CPI inflation print scheduled for Friday. Some extension of the USD rebound fueled by the positive sentiment that started last week is possible, and maybe even likely. However, it probably won’t come easy considering the strong dollar bear trend that we are still in. Also, dollar bulls have to crack some key technical levels before they can clear the road for further gains.
Euro Fundamental Outlook: ECB Pressed to Do More After Big Inflation Miss; EUR Longs at Risk of a Correction
The main focus for Fx traders this week is the ECB meeting on Thursday. The euro is vulnerable to a correction stemming from possible ECB action in response to last week’s big shortfall on CPI inflation. The euro saw the weekly high on Tuesday when core CPI inflation missed expectations by 0.5% (0.4% actual vs. 0.9% forecast). The ECB may decide to respond with dovish measures at this meeting already, such as by increasing the
size of QE or announcing a similar inflation strategy to the Fed’s average inflation targeting. The euro would likely correct lower under such a scenario, possibly even sharply so given the crowded long positioning.
We also saw the first display of verbal intervention from ECB policymakers. As soon as EURUSD hit the 1.20 level last Tuesday, chief ECB economist Philip Lane crossed the wires saying that, “we (the ECB) don’t target exchange rates, but EURUSD is important.” This was an important sign, especially ahead of the ECB meeting, and ramps up the expectations that the ECB will either act or preannounce new easing measures for the future.
EURUSD Technical Outlook:
EURUSD is again testing the 1.18 area at the start of the new week after getting sharply rejected at 1.20 last week. The reversal at 1.20 turns the technical picture slightly bearish, though it won’t be confirmed without a breakout below 1.18. Technically, as long as 1.18 holds, the trend that started in May is still alive and bullish. A break below 1.18 would signal the end of this trend and, most likely, the start of a
correction.
Below 1.18, the next key technical support area is 1.15, which looks very likely to be reached if 1.18 breaks. To the upside, firm resistance now stands at 1.20, ahead of the rising trendline of the channel.
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