The long US weekend is behind us now, and the markets focus on the main event of the trading week – the FOMC Minutes to be released tomorrow. The Fed delivered a hawkish statement at its June meeting, and the EUR/USD pair dropped ever since.
Truth be said, the technical picture looked weak even when the EUR/USD pair traded above 1.22. It formed a head and shoulders pattern that broke lower and now the attention is on tomorrow’s release to see if other hawkish details exist.
Earlier today, the German Factory Orders took the market by surprise. Instead of a monthly increase of 0.9%, the factory orders in the largest European economy have declined by -3.7%, much worse than the market expected. The euro took a dive since the release, trading with a weak tone across the board. As such, the EUR/USD pair declined from close to 1.19 to 1.1830 area, the EUR/JPY fell back to 131, and the EUR/AUD continued its bearish trend.
The dollar’s strength comes at a time when the US stock markets are at their highs. Also, the price of oil has reached six year high, diverging from the dollar’s strength.
What it tells us is that the market expects higher inflation due to the price of oil’s resilience to drop. But higher inflation means that it is not transitory; hence the Fed will have to do something about it. Also, the recent NFP report showed ongoing recovery in the labor market, thus further putting pressure on the Fed.
The technical picture favors a move back to the 1.17 area, an area from where the EUR/USD bounced in April. A daily close below opens the gates for 1.15 and beyond, as bears will likely sell on a breach.
Bears may want to stay on the short side with a stop-loss order at 1.1950 and a take-profit level just below 1.15.
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