Weekly Analysis: The greenback made serious advances against its counterparts last week, backed by strong U.S. economic data. Important levels were broken and downside momentum is now starting to pick up.
The break of 1.1040 and 1.0980 seen last week shows that the bears are tilting the balance in their favor and that 1.0800 might be the next target. This is a key support level as seen from previous price action (note the grey rectangles to the left – falling price was rejected higher several times) and if broken, it can affect the long term movement of the pair. The Stochastic has reached oversold but the Relative Strength Index doesn’t show an extreme reading so the picture offered by the oscillators is mixed; a move up is likely to find some resistance at the recently broken levels as well as at the 50 period Exponential Moving Average.
The week starts with the release of the Flash Estimate version of the Eurozone Consumer Price Index scheduled Monday; this is the main gauge of inflation but the German CPI has been already released last week so Monday’s indicator might lack a strong impact.
Tuesday the US Dollar will be affected by the release of the Manufacturing PMI, an indicator derived from the opinions of purchasing managers regarding business conditions in the manufacturing sector. Action picks up Wednesday with a first look at American jobs situation as Automatic Data Processing will release their version of the Non-Farm Employment Change. Although important, the impact of this indicator is lower than the one of the Government jobs data that comes out 2 days later.
Thursday the Euro will be affected by the Eurozone Retail Sales and Friday is a huge day for the US Dollar as the Non-Farm Employment Change (also known as Non-Farm Payrolls) comes out, showing the change in the number of new jobs created during the previous month. This is by far the most important jobs data released by the United States and usually creates increased volatility and possibly sharp turns.
Last week the long term support at 1.4050 was broken and thus the downtrend has been resumed. The bears made substantial advances and we are likely to see more downside action.
Volatility increased and the pair traveled a long distance south, breaking 1.4050 and then re-testing it from below. This level can now be considered resistance and the next potential support is located at 1.3655. However, price last visited the mentioned level in 2009 so we cannot accurately predict how it will react on another touch. The fact that a long distance was covered in a relatively short while makes us believe that some sort of bullish retracement will follow, or at least a period of choppy, sideways movement but the primary trend is clearly bearish.
This week the Pound’s movement will be influenced by three important indexes: Tuesday the Manufacturing Purchasing Managers’ Index (PMI) comes out, followed Wednesday by the Construction PMI and Thursday by the Services PMI. These indexes are derived from the opinions of purchasing managers from the respective sectors and act as leading indicators of economic health. Usually, higher than anticipated numbers strengthen the Pound and the opposite is true for lower numbers. As always, the pair will be directly influenced by the U.S. data that comes out during the week.
Written by: Bogdan Giulvezan