Chart Of The Day: EUR/USD Rebound Unlikely To Hold

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Thanks to the Good Friday holiday and the long weekend, the foreign exchange markets should be quiet today. But the is one to watch in the days and weeks ahead, given the stark contrast in the directions the two economic regions are heading.

Whereas a strong stimulus-fuelled recovery is widely expected for the US, a virus-hit Europe is in danger of remaining in lockdown longer than anticipated. This should prevent the EUR/USD from staging any meaningful recovery in the short-term outlook. 

Vaccinations in much of mainland Europe have been hit by delays and the number of infections is rising across the region, including Germany, France, Spain and Belgium. France was the latest European country forced to announce new lockdown measures, lasting four weeks. With increased mobility and gatherings over Easter, the virus could spread further. Investors are worried that the travel and hospitality sectors could be in danger of collapsing if Europe does not sort out the situation, with the warmer summer months and holiday season just around the corner now. Worrying, only 16% of people in European Union have had a single dose of coronavirus vaccine.

The EUR/USD might have bounced back over the past two days, and it may even end the week higher if today’s US turns out to be very weak. But the underlying trend and momentum is bearish due to the above fundamental reasons. As such, I am expecting the EUR/USD to resume lower and potentially head below support at 1.1615/1.1600 in the not-too-distant future:

Short-term resistance at around 1.1780 was being tested at the time of writing. Above here, the next level of resistance is seen around 1.1800, which is where the bearish trend line comes into play. Further higher, we have the old support coming in around 1.1850. In short, there are lots of overhead resistance levels that could prevent the EUR/USD from staging a deeper recovery. 

In terms of support, 1.1760 is a pivotal short-term level to watch. The bears will want to see price break below this level, as it could then lead to further technical selling towards this week’s low at just above 1.1700 handle. But as mentioned, we could be heading further lower in the days to come, with the area below 1.1600 likely to be the next target for the sellers (there is little doubt that beneath that level, lots of stop loss orders from many trapped bulls would be residing).

Meanwhile, with the monthly US nonfarm jobs report scheduled for release later, the EUR/USD may move sharply when the data is released, even if most people are out on a long weekend break.

Economists are predicting a strong showing. The headline jobs growth is expected to print 652k, which would be 6-month high. The unemployment rate is seen edging lower to 6.0% from 6.2%. But don’t forget the average hourly earnings figure, given how has become the key focus point amid all the stimulus and recovery prospects. However, this is anticipated to rise just 0.1% m/m, which means that in the event wage inflation turns out to be stronger, then we might see a more profound dollar reaction (assuming the headline jobs growth is around the expected figure).

If you are trading the NFP today, there are some important considerations to take into account, which apply to all major FX pairs and not necessarily just the EUR/USD:

  • Thin volumes mean the markets could be a bit erratic before the jobs report is released as traders jostle for position and fight for available liquidity. So, looking for false moves above recent highs or below recent lows might be a good way to enter a trade.  
  • The post-release reaction may peter out quickly, which means taking profit at the next key support or resistance may be the best course of action for short-term-focused traders rather than holding and hoping for a big move
  • Fading the NFP reaction may also be an option provided the data is not too strong or too weak compared to expectations.

Good luck and have a happy long weekend break!

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