EURUSD remains under pressure after 4 weeks of decline

05 Oct 2021

EURUSD closed in the red for the fourth consecutive week last Friday, sending the pair down to 1.15933, a level not seen since July 2020. The fundamentals around the currency pair favour the bear while the technical set-up paints a similar picture. The US Dollar Index (DXY) which measures the strength of the greenback against a basket of major currencies hit the highest level in a year with a reading of 94.5 last Thursday. The spike in the dollar could be attributed to a few factors.

Evergrande Crisis

Firstly, the resurfacing of concerns for the Evergrande situation has sent markets into a risk-off mood which benefits the greenback as a safe haven currency. The heavily indebted Evergrande, which was once China’s biggest developer, is close to defaulting $305 billion in liabilities. On Monday, trading in the company’s shares were halted ahead of its transaction to sell 51% stake in its property management unit to Hopson Development for more than $5 billion. The deal has sparked broader concerns about the risk of contagion, or a serious impact on China’s property sector as well as the global financial system, if the company collapses.

Persistent inflation

Next, the imminent tapering by the US Federal Reserve amid stubborn inflation has provided a boost to the dollar. August Core Personal Consumption Expenditures (CPE) released by the US Bureau of Economic Analysis registered a 3.6% increase over the past 12 months, similar to July 2021, which is a 30-year high. The Personal Consumption Expenditures Price Index (PCE) is regarded as a more accurate measure of inflation than the Consumer Price Index (CPI) as it tracks a broader range of goods and places more weight to substitutions (when consumers buy cheaper products to substitute for more expensive ones). The persistently high inflation figures have led Fed officials to acknowledge that the inflation could remain high well into 2022 because of ongoing shortages of crucial business supplies.

US Nonfarm Payroll

Markets are paying close attention to Nonfarm Payrolls data due this Friday. A reading higher than market consensus of 460K will further cement the likelihood of a tapering announcement by the Fed in November, which is bullish for the US dollar.

Technical Analysis

On the weekly timeframe, the EURUSD extended further losses after failing to retest the neckline of a completed head and shoulders pattern. At the time of analysis, the pair finds support, slightly above the 50% Fibonacci level, after recovering from a dip below the level in the week prior. In terms of technical indicators, the RSI is bearish pointing below 50. The MACD is also showing bearish momentum with the histogram deep in negative region and above its signal line. If the pair slips and closes below the 50% Fibonacci level, the next technical target will be set around 1.1359 which is the 38.2% Fibonacci level. In the alternate scenario when the pair gains strength to the upside, 1.18 will be a strong resistance to watch.

Key events to watch in the coming week:

Tuesday, October 5

USD – Goods and Services Trade Balance (Aug), Markit Services PMI (Sep), ISM Services PMI (Sep)

EUR – ECB’s President Lagarde speech, Eurozone Markit PMI Composite

Wednesday, October 6

EUR – Retail Sales (YoY), (MoM)(Aug)

USD – ADP Employment Change (Sep)

Thursday, October 7

EUR – Germany Industrial Production s.a. (MoM)(Aug), ECB’s Elderson speech, ECB’s Lane speech, ECB Monetary Policy Meeting Accounts, ECB’s Schnabel speech

USD – Initial Jobless Claims (Oct 1), Fed’s Williams speech

Friday, October 8

USD – Nonfarm Payrolls (Sep), Labor Force Participation Rate (Sep), Unemployment Rate (Sep)

EUR – ECB’s Panetta speech

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