EUR/USD Weekly Forecast July 3-7
Frankfurt (July 2) EUR/USD made a bullish break from a five-week range to close the week out at the highest level in over a year. ECB President Mario Draghi provided the catalyst for the upside move as his comments have led the markets to believe that policymakers will look to tighten monetary policy sooner than expected.
Draghi commented that slowing inflation was as a result of temporary factors and that deflationary forces were being replaced with inflationary ones.
While similar comments from Fed Chair Yellen regarding inflation have not had much of an impact on the greenback, the single currency surged on Draghi’s comments causing a broadly weaker dollar. EUR/USD added 156 points in a single day advance and broke above resistance at 1.1299 which was the US election spike high. Along with the break of the horizontal level, the pair broke higher from a consolidation that has taken place since mid-May.
The markets switched their attention to the ECB after focusing on the Fed over the prior two weeks. Initially the Fed meeting dominated and then the Fed member speeches that followed. The biggest takeaway from the Fed in June was that policymakers felt somewhat threatened with the rapid decline in the unemployment rate and fear the risk of a recession if forced to normalize more rapidly than currently expected.
The US jobs report in the upcoming week will tend to shift the focus back on the Fed for this reason. The spotlight will be on the unemployment rate which has declined over the past four consecutive readings and is at a 16-year low. At the start of the year, the Fed expected the jobless rate to reach a low of 4.5% in 2017. It reached this level in March and declined to 4.3% in May.
Analysts are expecting the unemployment rate to remain unchanged at 4.3%. A further drop would tend to renew concerns among the Fed and likely cause the central bank to look at raising rates sooner.
The average hourly earnings will also be an important aspect of the report and an uptick would provide some evidence of deflationary forces subsiding, renewing confidence in the Fed’s proposed path of normalization.
In addition to the US jobs report, the Federal Reserve will release minutes from their June meeting on Wednesday and the ADP will release their jobs figures on Thursday. Manufacturing and non-manufacturing PMI’s will be released on Tuesday and Wednesday.
EUR/USD trades at major resistance to start out the month of July and a catalyst may be required for the pair to extend gains. Resistance at 1.1445 had held the pair lower in May 2015 and April 2016, as seen on a weekly chart. The last time the pair closed above this level on a weekly basis was in January 2015. In addition to the horizontal level, a declining trendline that connects the 2015 high with the 2016 high comes into play, slightly above the 1.1445.
Source: EconomicCalendar
