In our previous EUR/USD forecast, we noted that the currency pair attempted to breach the lower bollinger band and the important technical and sentiment region of 1.11. The price level was crucial as the previous bearish momentum failed to overcome this region. If bullish pressure attempted to go for a recovery, the EUR/USD would make a run for 1.12 and followed by the middle bollinger band.
We saw the German Preliminary Consumer Price Index reported a better than expected result of 0.5%. The US also reported much better than expected CB Consumer Confidence with more than 5% to the upside.
US President Donald Trump mentioned that the US will impose an additional 10% tariffs on $300 billion worth of Chinese imports from 1st September. There are concerns that this may lead to an extremely unfavorable economic situation and is likely to induce some risk aversion.
While the Federal Funds Rate was reduced by 0.25%, the US dollar remained resilient. The likely reason to this would be that the market was predicting a number of cuts to the interest rate and when the US Federal Reserve Chairman Jerome Powell mentioned that the cut was a “mid-cycle adjustment”, the possibility that this might be the only cut resulted in the US dollar gaining strength.
Looking at the EUR/USD weekly chart above we note that the currency pair ended the week at the important sentiment and technical region of 1.12. As expected, the return of bullish pressure led the currency pair on a test of the 1.12 region and middle bollinger band.
A continuation of the bullish recovery will likely require the EUR/USD to breach the middle bollinger and before heading on to 1.13. The important sentiment and technical region of 1.14 will be the extended bullish target.
If the bearish momentum returns, we may see a test of the lower bollinger band and 1.11 support. The important sentiment and technical region of 1.10 will be the extended bearish target.
Euro Gains Early
The start of the week saw the euro gained as weak data from the US surfaced. The USA ISM Non-Manufacturing PMI was reported to be 53.7 instead of 55.5. The Purchasing Managers’ Index is a survey of purchasing managers and is important as the sentiment of purchasing managers is a leading indicator of economic health. A healthy sentiment suggests that an economy is moving along well while a cautious sentiment may see less business activities due to prudence.
German Factory Orders came out much better than expected. It was reported to be 2.5% instead of 0.5%. That is 5 times higher than expected! Factory orders serve as a leading indicator of economic activity. If orders are high, production will be increased. This flows downstream leading to employment, revenue and more. Germany is a significant component of the Euro economy and this development likely boosted the Euro currency.
Apprehension Takes Over
With the continued apprehension towards the US and China trade war, any momentum fueled by risk appetite is probably frozen by mid week. This is quite visible on the hourly chart. Conflicting developments continue to affect sentiment as more tariff were imposed while talks were underway. There were also claims by the US of China engaging in currency manipulation.
Investors are risk averse towards geo political challenges. Looking at the gold chart below, we see that the “safe haven” asset has rallied significantly as the tensions increased.
Dark Clouds May Be Gathering
Towards the end of the week, France reported it’s industrial production. It was much worse than expected at -2.3% instead of 2.1%. This is a reduction of production. Industrial production serves as a leading indicator of economic activity. If it is high, the momentum will flows downstream as increases to employment, revenue and more. As the third largest economy in the European Union after Germany and UK, it is likely that a dent on the sentiment towards the euro currency had been made.
The Week Ahead
There are numerous economic events in the week ahead. It is important to monitor the outcomes and assess if they are of a positive or negative sentiment to the currency. Price action in the shorter time frames are usually sentiment based.
German ZEW Economic Sentiment
As a survey of analysts, this sentiment report holds a weight. Their sentiments may be derived from their working knowledge of the economy and hence may be an early indicator of economic health.
USA Core CPI
Consumer Price Index is important because the price of consumer goods is a significant component of inflation. If inflation is high, a central bank may increase interest rate to mitigate the situation. Speculations of a possible interest rate hike may generate demand for the currency.
German Preliminary GDP
Gross domestic product is a measure of the monetary market value of all the goods and services produced. It is an overall measure of economic activity and health and thus wields influence on the home currency.
USA Core Retail Sales
USA Retail Sales
Retail sales is a fundamental component of the economy. As consumers spend, it translates to revenue and flows up stream as salaries, wholesales purchase, production orders and so on.
USA Philly Fed Manufacturing Index
Business surveys are influential as the sentiment of businesses is a leading indicator of economic health. A healthy sentiment suggests that an economy is moving along well while a cautious sentiment may see less business activities due to prudence.
USA Building Permits
The construction of a building generates many economic activities. Jobs will be created for construction workers, the various sub contractors and services associated with new buildings such as power, water, furniture and so on.
USA Preliminary UoM Consumer Sentiment
Consumer surveys are influential as the sentiment of consumers is a leading indicator of economic health. A healthy sentiment suggests that an economy is moving along well and hence consumers are confident. This likely leads to increased retail sales. A cautious sentiment on the other hand may see consumers spend less in view of a perceived upcoming economic crisis.
There are many more events and hence it is important to follow an economic calendar. By doing so, you can reduce the possibility of an unexpected development affecting your trading plan.
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Traders should always practice proper money management and seek to understand the underlying tones for the market.