NFP Report and ECB Rate Cut Loom: Market Poised for Action

EUR/USD: Technical Patterns Hint at Volatility

May ended on a bad note for the US Dollar Index (DXY), which dropped 1.54% for the month but is still up around 3% for the year. Inflation was the main focus of last week, with the U.S. Personal Consumption Expenditure Index (PCE) showing a 0.2% drop, exceeding the 0.3% forecast.

On the other side of the pond, European inflation swelled and we saw the Core CPI Flash Estimate (y/y) rise to 2.9% from the previous 2.7%. It will be interesting to see how the European Central Bank (ECB) tackles this situation considering that, according to consensus, the ECB will cut rates at this week’s meeting. And if that is so, then how will this inflation spike affect the next rate decisions?

Both the US Dollar and the Euro are in for a busy week that will end with the always-important U.S. jobs data: the Non-Farm Employment report, Average Hourly Earnings, and the Unemployment Rate.

Economic Calendar Highlights

Monday at 2:00 pm GMT the U.S. Manufacturing PMI will come out, showing the opinions of about 300 purchasing managers on business conditions and overall economic health in the Manufacturing sector. Wednesday at 2:00 pm GMT a similar Purchasing Managers’ Index will come out but for the Services sector.

Thursday at 12:15 pm GMT, the ECB will announce the interest rate, which is expected to change from the current 4.50% to 4.25%. It’s the smallest cut possible but it remains to be seen if they will take even this small step considering the latest inflation data. At 12:45 pm GMT, ECB President Christine Lagarde will hold the usual press conference. It will be very important to see if she offers any type of forward guidance and if more rate cuts are scheduled.

Friday at 12:30 pm GMT we take a look at the U.S. jobs data, with the most important being the Non-Farm Payrolls (NFP) report. Job creation is a key metric that helps the Fed assess the overall state of the economy and to gauge inflationary pressures. The release always creates a buzz in the markets and on the charts.

Technical Outlook – EUR/USD

The pair is currently trading at 1.0850 after several attempts to break the resistance at 1.0890. These recent touches of resistance have created a triple top, which was very close to being a quadruple top (the last move was rejected at 1.0882).

Overall, this is a bearish pattern and is strengthened by the fact that the RSI was going down when the price was making the triple top. It is a form of bearish divergence that warns of a future drop.

However, for the time being, EUR/USD is trapped between 1.0890 and 1.0775. A break to either side will likely generate additional movement to that side. Considering that both the dollar and the euro will be affected by key data this week, the technical aspect will probably play second fiddle.