Analysts’ Pick: Will EUR/USD retest the recent two-year high of 1.1951?
- ECB’s monetary policy accounts may put some upside pressure on the euro as there may hints of optimism among policymakers due to better-than-expected economic data in the EU.
- Investors will likely be focused on any opposing views among policymakers on the full utilisation of PEPP, which likely tilts the impact of euro slightly towards the upside thanks to earlier signals from ECB Executive Board members.
- The meeting minutes will probably still highlight the economic uncertainty resulting from the pandemic.
- The decline in jobless benefit claims looks more likely to continue, especially with increased incentive for workers to return to work as not the entire workforce will be able to benefit from the temporary unemployment measures from the White House.
- EUR/USD may have some temporary and slight upside on both economic releases as a result.
- In the medium-term, it does look likely that fundamentals favour the euro, although temporary downside corrections are probable.
Focus of the day will be on any conflicts in opinions between policymakers in the European Central Bank's (ECB) detailed accounts of its monetary policy meeting earlier in July. ECB President Christine Lagarde's post-meeting press conference signalled that policymakers may have had opposing views on the use of the central bank's Pandemic Purchase Emergency Program (PEPP) after comments that the central bank's baseline scenario was to use the entire sum set aside for the PEPP of 1.35 trillion euros. In contrast, there have been signals from other ECB Executive board members that signs of economic recovery may deter the bank from making full use of the PEPP funds.
The Eurozone’s economic contraction likely peaked in April and is now experiencing a faster-than-expected recovery in economic activity
Contrasting views among policymakers looks increasingly likely as well with the Eurozone showing signs of an imbalanced economic recovery. While the overall European economy is experiencing a recovery following a tight squeeze on economic activity due to lockdowns in major European economies, the impact of the Covid-19 has varied among member countries and will result in an imbalanced recovery in addition to varied risks moving forward.
While EU member countries has been able to contain the virus, spikes in multiple member countries suggests that the Eurozone may experience a resurgence in Covid-19 cases next especially with the current vacation season in multiple member countries
This will likely be amplified by a potential second wave of Covid-19 cases as other countries around the world have already given the EU a preview of that possibility. A second wave at this point looks more likely than not, with some member countries already showing signs of it. But another nationwide lockdown is unlikely since the benefits of keeping the economy afloat will probably outweigh the containment of the spread of the virus at this point in time. More probable is for countries to manage the containment with minimal restrictions by ensuring that hospital capacities remain at manageable levels.
Uncertainty is then likely to be the key language of the ECB's minutes. While there were hints of a better-than-expected economic recovery in the EU, policymakers will likely try to keep their tone similarly dovish to previous meetings on the uncertainty the global economy faces. We do also expect some optimism from the ECB however, as a result of the better-than-expected data, although this will likely be cautious optimism rather than a robust switch to bullish sentiment. The euro should as a result show some slight strength on the release of the accounts.
The next important set of data will be jobless benefits data in the US at 8.30pm (GMT +8). Today's release will be the first week that the continuing claims dataset reflects the expiration of enhanced jobless benefits, which should implicitly mean a dip in the number of people applying for benefits for the second time or more. Initial claims look likely to continue into a second week of decline despite the US' efforts to extend the enhanced employment benefits with signed executive orders from US President Donald Trump. The measures included allowing for the unemployed to receive up to US$300 a week from the government in enhanced benefit claims. This is due to the restrictions on the benefits, which only allows claimants who are eligible for at least US$100 a week in existing unemployment benefits to be able to be eligible for the enhanced claims. In addition, with most states still applying and waiting from approval from the Federal Emergency Management Agency (FEMA), it does look more likely that it will take more time than expected for the enhanced benefits to reach the unemployed.
Expect jobless claims data to continue its downtrend as the expiration of enhanced jobless benefits increases incentives for workers to look for jobs
As a result, EUR/USD may have some room to rise despite possible upward momentum for the dollar due to the Fed's reduced dovish tone in their latest monetary policy minutes, as well as its weaker outlook for the US economy. While the immediate impact may only be temporary and slight, it does look likely that the EUR/USD currency pair has more upside potential on both economic releases today, possibly putting upward pressure on the currency pair closer towards 1.1899's level, i.e. which represents an upside potential of roughly 0.30%. In the medium-term, the currency pair may suffer multiple other declines resulting from a stronger dollar, but it looks more likely that it will be temporary corrections instead of a sharp reversal in the currency pair which does suggest that we may see another retest of the 1.9151 resistance level in the medium-term. Downside risks for the currency pair includes negative news in regards to the already delayed stimulus measures in the US.
The euro suffered a sharp reversal after trading at the two-year high of 1.1951 on Wednesday after some dampened optimism resulting from the Fed’s July monetary policy meeting minutes. It does however look more likely to be a temporary short-term correction due to the sharpness of the current overall uptrend. EUR/USD continues to trade within the 78.6% Fibonacci retracement zone with little sign of breaking that resistance in the short-term. A more bullish perspective for the euro against the dollar suggests that the corrections are more indicative of a strong bull run, since weak hands are being shaken out on each downturn which should strengthen the case for the euro over the medium-term. RSI trending closer towards the oversold levels also suggest that downside may be limited following the recent decline in the currency pair. As a result, we may see EUR/USD retest the 1.1951 level again in the near future.
Support: 1.1798 / 1.1706 / 1.1625
Resistance: 1.1899 / 1.1951 / 1.2023
EUR/USD Chart (H4)