EUR/USD holds 1.09 ahead of NFP, gold consolidates: European open

Asian Indices:

• Australia's ASX 200 index rose by 5.3 points (0.07%) and currently trades at 7,317.00
• Japan's Nikkei 225 index has fallen by -27.25 points (-0.08%) and currently trades at 32,132.03
• Hong Kong's Hang Seng index has risen by 263.42 points (1.36%) and currently trades at 19,684.29
• China's A50 Index has risen by 154.6 points (1.17%) and currently trades at 13,386.93

UK and Europe:

• UK's FTSE 100 futures are currently up 29.5 points (0.39%), the cash market is currently estimated to open at 7,558.66
• Euro STOXX 50 futures are currently up 24 points (0.56%), the cash market is currently estimated to open at 4,328.63
• Germany's DAX futures are currently up 62 points (0.39%), the cash market is currently estimated to open at 15,955.38

US Futures:

• DJI futures are currently up 99 points (0.28%)
• S&P 500 futures are currently up 22 points (0.49%)
• Nasdaq 100 futures are currently up 115.25 points (0.75%)

The monthly Nonfarm payrolls report is here (NFP), although 1-day implied volatility levels are not exactly pricing it to be a large event for currencies. USD/JPY and GBP/USD have the highest 1-day IVs of around +/- 90 pips, and the 1-day IV of USD/CAD is only 60% of its 20-day average daily range despite US and Canada releasing employment reports together at 13:30 BST.

Yet US bond yields have surged higher ahead of NFP, partly due to stronger economic data and of course the fact that Fitch downgraded their US credit rating score (making bond less desirable, and pushing yields higher as they trade inversely to bond prices).

However, US employment data this week has been mixed. 324k jobs were added in July according to the ADP report, well above the 189k expected following a near 500k print in May. Job layoffs also fell to a 11-month low, although the ISM manufacturing employment index fell to a 3-yeara low and the ISM services PMI revealed a barely expansive employment index. In all likelihood, NFP will deliver at least okay numbers which could prompt another bid for the US dollar ahead of the weekend. But as I highlight below, USD bulls may want to urge some caution around current levels as we head into next week.

The US dollar has had a decent rally since its July lows, although momentum is showing the early stages of a pullback or reversal. A bearish engulfing day formed on USD/JPY and USD/CHF and a bullish pinbar formed on GBP/USD despite the BOE’s relatively dovish 25bp hike. Even the Australian dollar managed to close with a small bullish candle after two heavy days of selling and the US dollar index is showing a hesitancy to test 103. And if the US dollar is faltering, it leaves the potential for EUR/USD to form a swing low.

EUR/USD daily chart:

EUR/USD has fallen -3.2% over the past 12 days and on track for its third weekly close lower. We should probably factor in the potential for another strong employment report for the US today, but as we head into next week we are wondering if the euro is at or near an inflection point.

The daily chart shows that a small bullish candle formed above the 1.0900 handle yesterday, and even if that is to be breached today and see prices dip beneath 1.09, I’d be surprised if it simply continued lower through the 1.0834 low. In fact, previous ranges or consolidation areas (such the falling wedge in June) can act as support zone. Of we look at the tick volume within that falling wedge, the most traded level was at 1.0909, just a few ticks beneath yesterday’s low. From here, we’re looking for any bearish tails to close back above the 1.0900 area to suggest a swing low has formed, then keep an open upside target. The fundamentals may not be in favour of this setup immediately but they rarely are at inflection points. The technical; key here is that we need to see prices fail to break low and then assume short covering take places to help with the earlier stages of a potential rally.

Gold 4-hour chart:

Gold could be vulnerable to further losses if NFP delivers a punch set of numbers, given that bond yields are surging and strong employment backs up a hawkish narrative for the Fed. Prices are within a downtrend on the 4-hour chart but consolidating around its cycle lows. I’d be mindful of ‘fakeouts’ of the current range leading up to the NFP report, whereas as a strong data set could see prices break lower whilst a surprise weak data set could lead to a break high. Anything other than a large miss or beat relative to expectations risks a false break and reversion ack within its range.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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