Are we close to a major move on the EURUSD?

The EURUSD currency pair has been trading in a narrow consolidation for a long while. The 1.12-1.13 support zone has prevented declines but the euro has been unable to capitalize on it. Having two big events ahead – the ECB meeting and the NFP report – are we close to a breakout?

Summary:

  • ECB to cut forecasts
  • The NFP could show another solid rise in employment
  • EURUSD awaiting a major technical impulse

The ECB meeting – Thursday 12:45pm GMT (decision), 1:30pm GMT (post-meeting conference)

Only few months ago the ECB hoped to raise rates in 2019 as such move would confirm an ongoing recovery in the euro zone. With business activity slowing sharply these hopes are now completely gone and the attention has turned to actions that could support growth. The ECB will cut macroeconomic projections, but to what extent? A forecast of growth below 1.5% for 2020 would admit that the economy is in trouble but the Bank might not be ready for this move. Moreover, investors will await the details of TLTRO financing – a program that could support the economy but is certainly far less flashy for the markets than the QE (quantitative easing – a program the was terminated in December).

Bond yields spread and EURUSD have diverged but the euro has been unable to close this gap so far. Source: Bloomberg, XTB Research

The NFP report – Friday 1:30pm GMT

Employment reports have been very strong recently with the past two showing both strong employment growth and upward pressure in wages. As a consequence traders once again speculate about interest rate hike in the US. Statistically February was the best month for employment between 2011 and 2018 so markets are comfortable ahead of the report. Is this complacence risky? We had only 4 situations since 2011 when employment grew (according to the first release) by at least 300k for 2 months in a row. The next month brought an employment decline of 27k on average but the span was between -378 to +502k! That makes the incoming report very intriguing. Further strong rise in employment and wage growth would cement expectations for interest rate hike while a weak report (below 150k) would cool sentiment towards the US economy.

February has been an extremely good month for employment during this decade – so far. Source: Macrobond, XTB Research

EURUSD technical situation

The support zone of 1.12-1.13 has been like a rock bottom for the EURUSD but then again the euro has been unable to capitalize on it, leading us to a triangle pattern with increasingly less room inside. Technically a triangle is a continuation formation but it’s not bullet-proof and a strong impulse from the 1.13 level could be decisive for setting a direction.

The triangle pattern has increasingly less room inside, making a major breakout more likely. Source: xStation5

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