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EUR/USD Oversold: How to Play a Potential Post-FOMC Short-Squeeze Rally

Published 2024-06-11, 08:25 a/m
EUR/USD
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FCHI
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DX
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From its high point on Friday to its lowest so far this week, the EUR/USD has fallen about 170 pips, or 1.57% in the pace of two and a half sessions. Friday’s drop was triggered by a stronger US jobs report, while the further weakness so far this week has been in response to the weekend’s surprise election results in the European Parliament, prompting French President Macron to call on a snap election to halt the rise of rival and far-right Marine Le Pen.

The uncertainty has weighed on risk assets for now, with European stock indices also struggling to hold onto any gains. But the market’s focus is likely to shift swiftly, with stocks, bonds and the US dollar all subject to heightened volatility as we have US CPI and the Fed’s rate decision coming up on Wednesday.

Fallout from EU election hits single currency

The markets reacted negatively on Monday with both the CAC 40 and euro falling following European elections turmoil and France's decision to call a snap election. Markets generally don't like uncertainty and not when far-right parties are making gains across Europe, especially in Austria, Italy, and Germany.

However, these types of moves tend to fade quickly, and I wouldn't be surprised if that happens again once we head deeper into the trading week. However, it may lower the longer-term EUR/USD forecast, should support for the far-right governments rise further across the board, leading to policies that are potentially damaging to the economy.

Investors are no longer pessimistic about Eurozone for the first time since Feb 2022

There are no major data releases on the economic calendar, until Wednesday. Yesterday we saw a surprise 1% drop in Italian industrial production. This overshadowed a small rise in investor optimism, as the closely watched Sentix Investor Confidence barometer rose to 0.3 in June from -3.6 (pessimistic) the month before.

This is a survey of about 2,800 investors and analysts, which asks respondents to rate the relative 6-month economic outlook for the Eurozone. The fact that we have now risen back to the optimistic territory, can only be a good thing, even if it has just about climbed back above the zero line. It means that investors are no longer pessimistic on the Eurozone outlook for the first time since February 2022. This follows a stronger recovery across a swathe of Southern Europe. Greece, Spain and Portugal have become the Eurozone’s outperformers.

Meanwhile, today’s US economic calendar is quiet, but there are plenty of macro events taking place later in the week that could help drive the markets.

US CPI is this week’s key data release after a strong NFP

It is all about the timing of the first Fed rate cut, which has been pushed around significantly throughout this year. Initially, markets had expected the rate cut to come in June, before a series of stronger data releases pushed it to December and recently, we have seen a few mixed data releases and it is now expected to be September. On Friday, the US dollar rallied on the back of a strong US non-farm payrolls report, which caused yields to rise again.

The headline non-farm payrolls rose by 272,000, which was much stronger compared to expectations. While this was offset slightly by a downward revision to April’s figure and the unemployment rate unexpectedly climbing to 4.0%, average wages came in hotter at +0.4% m/m. The data suggests the jobs market is not cooling as fast as indicated by other labor market data released in recent days. With wages remaining strong, this will discourage the Fed to start cutting rates sooner than September, at the earliest.

This week’s CPI report could have significant implications on the market’s expectations about the first rate. This could potentially cause sharp moves in gold, stock indices, and the dollar, and therefore impact the EUR/USD forecast.

CPI is expected to have increased 0.1% month-over-month in May, which, if correct, should keep the year-over-year rate unchanged at 3.4%. Core CPI is expected to show another 0.3% month-over-month increase, similar to April.

FOMC seen holding rates unchanged

Thanks to elevated inflationary pressures and hawkish Fed rhetoric, the market is no longer expecting Wednesday’s FOMC meeting to be a live one. The timing of the first Fed rate cut has been pushed back and now expected to happen in September. Overshadowing the FOMC meeting is the potential for the May CPI report, due for release earlier in the day, to deviate from expectations.

Else, if the Fed provides the strongest hint yet of a September cut then that could move the markets in the positive direction, as this will help reduce uncertainty. For what it is worth, I reckon the Fed will once again imply a “data-dependant” approach than pre-committing to a cut. However, if the Fed Chairman turns out to be more dovish than expected, then this should create a sell-off in the dollar, given that Friday’s strong US jobs report and the ISM services PMI have both helped to ease expectations over an economic slowdown.

Here's the full list of key macro pointers relevant to the EUR/USD on this week’s economic data calendar:

Date

Time (BST)

Currency

Forecast

Previous

Wed Jun 12

2:30am

CNY

CPI y/y

0.4%

0.3%

CNY

PPI y/y

-1.5%

-2.5%

1:30pm

USD

Core CPI m/m

0.3%

0.3%

USD

CPI m/m

0.1%

0.3%

USD

CPI y/y

3.4%

3.4%

7:00pm

USD

Federal Funds Rate

5.50%

5.50%

USD

FOMC Economic Projections

7:30pm

USD

FOMC Press Conference

Thu Jun 13

1:30pm

USD

Core PPI m/m

0.3%

0.5%

USD

PPI m/m

0.1%

0.5%

USD

Unemployment Claims

222K

229K

5:00pm

USD

Treasury Sec Yellen Speaks

6:01pm

USD

30-y Bond Auction

4.64|2.4

Fri Jun 14

3:00pm

USD

Prelim UoM Consumer Sentiment

73.0

69.1

USD

Prelim UoM Inflation Expectations

3.3%

6:30pm

EUR

ECB President Lagarde Speaks

EUR/USD technical analysis and trade ideas

EUR/USD Daily Chart

The EUR/USD’s direction could potentially change drastically, given the importance of this week’s macro events, mentioned above. For now, the short-term path of least resistance is to the downside with rates breaking below key support and the 200-day average around 1.0785 -1.0805 area on Monday.

This zone is now going to be the most important short-term resistance to watch. A potential break back above this zone could lead to a sharp short-squeeze rally post-FOMC. On the downside, 1.0700 looks to be next target for the bears, followed by the potential bullish trend line that is derived from connecting the lows of October last year and April of this year, around 1.0650.

Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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