EURUSD Holds Post-Payroll Gains, Market Weighs Rate-Rise Chances

EURUSD rates, charts and analysis

• EUR/USD It’s still close to a one-week high
• The markets believe that prices are rising on both sides of the pair
• But the euro The side may have more work to do

The euro weakened slightly on Monday, but managed to hold on to most of the gains it saw against the US dollar last week, a week that ended with a rally for the single currency for the currency bulls.

The dollar took a hit after official US employment data in which non-farm payroll growth for June came in below expectations. They are only up 209,000 when the market was hoping for 250,000. This, in turn, has fueled suspicions that the Fed may have less room to raise interest rates without causing economic damage.

Markets still believe that US interest rates will rise, most likely this month. But it’s fair to say there’s a little more uncertainty now about the size and duration of any further spikes, even if that could change with the next major data release.

On the “euro” side of the EUR/USD, of course, the markets are equally certain that borrowing costs will have to rise to combat viscous inflation in many of the Eurozone economies, notably Germany. ECB President Christine Lagarde has been dropping strong hints that she finds more hikes appropriate, and soon.

However, the national economies of the eurozone are not equal, either in levels of inflation or flexibility to withstand higher rates. For example, German politicians seem more optimistic about the need to increase hiking than their counterparts in Italy. The Governor of the Bank of Italy, Ignazio Fiesco, said last week that, in his view, the ECB can contain inflation by keeping interest rates steady at current levels for a longer period rather than raising them again. That stance appears to put him at odds with the leadership at Germany’s Bundesbank who seem more solidly behind Lagarde.

The euro could start to struggle if these rhetorical cracks widen.

However, the currency appears to be trading sideways against the dollar, as it often does during the Northern Hemisphere summer, albeit at very high levels. There isn’t a huge amount of top-notch economic data on track this week for traders to nibble on, but German inflation and sentiment numbers due on Tuesday will attract attention, as will official CPI numbers from the US on Wednesday.

Technical analysis of the EUR/USD pair

Chart compiled using TradingView

EUR/USD has spent the past two weeks trading in a well-defined trading range between the high of June 22nd at 1.10092 and the low of June 14th at 1.07990.

There seems little appetite to push the bounds of this range either on a bull bid at the 26th Apr 13 month high of 1.10958 or on the downside of key support at 1.07277. This is where the first Fibonacci retracement of the rally from the September lows to the April peaks comes in. The longer this trading range remains intact, the more likely it is that any breakout will provide a meaningful directional signal. The pair may remain uncomfortable above a range of moving averages, with the 100-day market approaching at 1.0826.

This could be a cause for concern among euro bulls, a breed that is getting rarer anyway according to IG’s own sentiment data. This finds only 38% of traders are bullish now, which may not mean that EUR/USD is on track for a major reversal, but perhaps a renewed test of a bearish range limit just below 1.08 seems more likely than an attempt at the top this week.

— By David Cottle for DailyFX