Week Ahead: How likely will EURUSD hit 1.05?

As the Thanksgiving festivities fade away, including the Black Friday/Cyber Monday sales as well as the excessive turkey consumption, it’s then time to digest some serious economic data and events over the coming week:

Monday, November 28

• AUD: Australia October retail sales
• EUR: European Central Bank President Christine Lagarde speech
• USD: Speeches by New York Fed President John Williams, St. Louis Fed President James Bullard

Tuesday, November 29

• JPY: Japan October unemployment, retail sales
• GBP: Bank of England’s Catherine Mann speech
• EUR: Germany November inflation, Eurozone November economic confidence
• CAD: Canada September GDP
• USD: US November consumer confidence
• Twitter to relaunch blue-tick verification

Wednesday, November 30

• JPY: Japan October industrial production
• CNY: China November PMIs
• AUD: Australia October inflation
• EUR: Eurozone November inflation, Germany November unemployment
• GBP: Bank of England Chief Economist Huw Pill speech
• USD: Fed Chair Jerome Powell speech, Fed Beige Book, US 3Q GDP (second estimate)
• US crude: EIA weekly oil inventory report

Thursday, December 1

• JPY: Bank of Japan Governor Haruhiko Kuroda speech
• CNY: China November Caixin manufacturing PMI
• EUR: Eurozone October unemployment, November manufacturing PMI, speech by ECB Chief Economist Philip Lane
• GBP: UK November manufacturing PMI (final)
• USD: US weekly initial jobless claims; October personal income/spending, PCE deflator; November manufacturing
• USD: Speeches by Dallas Fed President Lorie Logan, Fed Governor Michelle Bowman

Friday, December 2

• USD: US November jobs report, Chicago Fed President Charles Evans speech
• CAD: Canada November unemployment

 

The coming week appears set up for a major move in EURUSD, as markets await key data out of the Eurozone and the US economies.

• The Eurozone’s November consumer price index (CPI) is expected to remain at painful levels, with the CPI from the month prior hitting a record high of 10.7%.
   
• The headline US November nonfarm payrolls figure is forecasted to come in at 200,000 (lower than October’s 261k), while the unemployment rate is set to hold at 3.7%.

Ultimately, such economic data will be filtered the global tightening lens.

That means that markets will interpret the data based on whether or not they allow either the European Central Bank of the US Federal Reserve to carry on with larger interest rate hikes.

 

Keep in mind that inflation has been enemy #1 for major central banks, and their primary weapon in fending off the inflation beast is by raising interest rates.

• The stronger the inflationary pressures, the larger the rate hike (typically).
   
• The larger the rate hike (relative to other economies), the stronger its currency.
   
• However, aggressive hikes also carry the risk of triggering an economic recession.
• Hence, central banks may start to ease up on their rate hikes (either by opting for smaller rate hikes, or pausing, or even making a u-turn with a rate cut instead) if they grow concerned about incurring too much economic damage.

Hence, it’s the above narrative that will guide investors and traders, as they asses the EURUSD’s prospects over the week ahead, in light of the incoming data.

 

Here are potential scenarios:

1. EURUSD may move higher if Eurozone’s November inflation punched its way to a fresh record high above 10.7% + a higher-than-expected US unemployment rate/lower-than-expected headline US NFP number (<200k)
    
2. EURUSD may move lower if Eurozone inflation eases below October’s 10.7% + a lower-than-expected US unemployment rate/higher-than-expected headline US NFP (>200k)

 

Will EURUSD stay above or below its 200-day SMA?

EURUSD’s 200-day simple moving average (SMA) has exerted strong resistance over the world’s most popularly traded FX pair in recent sessions.

Note also that the 1.04 region was a key battleground between bulls and bears back in May/June, twice repelling euro bears (those who believe that EURUSD will fall).

 

Based on current levels, markets are forecasting a likelier-than-even chance (61%) that EURUSD would move northward and touch 1.05 by this time next week, as opposed to the 43% chance that EURUSD would moderate back down to 1.03 over the same period.

However, further gains may tip EURUSD over into ‘overbought’ territory, with its 14-day relative strength index now threatening to cross over the 70 threshold.

Such a technical event may signal an immediate pullback.

 

Ultimately, whether EURUSD can stay either above or below its 200-day SMA next week is set to depend on which central bank has been allowed to persist with supersized rate hikes.

 

EURUSD inflation Euro European Central Bank USD US jobs report Nonfarm Payrolls Fed rate hikes