EUR/USD – Trading the ECB Statement and NFP Report

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There are two key fundamental event risks for the EUR/USD this week. The first will be the ECB’s monetary policy statement today (11/6), and the NFP report on Friday (11/7). The EUR/USD has unsurprisingly started coiling ahead of these risk events.

EUR/USD 1H Chart 11/6
eurusd 1h chart 11/6

(click to enlarge)

The EUR/USD 1H chart shows a triangle consolidation. The bias is still bearish as price is again below the 200-, 100-, and 50-hour SMAs. The 1H RSI has held below 60 except for a brief moment earlier this week.

We recognize that price is essentially oscillating around the 1.25 handle, which should come into the calculation when we assess the technical conditions after the the ECB/NFP event risks.

Here are the possible combinations of outcomes. (H = hawkish) (D = Dovish) (N = Neutral)
ECB (H) NFP Strong
ECB (H) NFP Weak
ECB (H) NFP (N)

ECB (D) NFP Strong
ECB (D) NFP Weak
ECB (D) NFP (N)

ECB (N) NFP (N)
ECB (N) NFP Strong
ECB (N) NFP Weak

Here are the forecasts:

ECB is expected to hold its minimum bid rate at 0.50% and address weaker economic conditions in Europe. It is expected to keep QE on the table, but not expected to implement it yet, though BoJ’s recent action has some anticipating a dovish tone.

US Non-Farm Payroll Employment Change (October)
Forecast: 229K
Previous: 248K
us nfp oct 2014

(click to enlarge; source: tradingeconomics.com)
A reading above 250K would be a big positive surprise. A reading closer to 200K would be a disappointment, Below 200K would be a major disappointment. Still, note that a reading of 180K for August did not stop the USD from continuing to gain, so one poor jobs might not be able to stop the USD in its bullish run.

ECB likely neutral-dovish: For the ECB, the most likely scenario is a neutral to dovish tone. It is very unlikely we will hear any tone of optimism from the bank, though it might try to sound less worried and less intent on implementing further stimulus – this would be neutral.

1.25 is Key:
If the ECB is neutral,
the USD will become the driver of EUR/USD, and the NFP will be key. First let’s see where the EUR/USD relative to 1.25 after the ECB event. If it holds above, it shows EUR resilience, especially if the market initially shakes downwards due to a dovish tone. If so, a neutral to weak NFP might give way to a EUR/USD bullish correction.

Following a neutral ECB, a strong jobs report beating forecasts might give the USD strength across the board, and if price falls back below 1.25 after the NFP due to this, we can expect another bearish leg in the EUR/USD, first to the 1.2440 low then towards the 1.24 handle.

If the ECB is dovish and EUR/USD falls below 1.25 we should look for a bearish continuation scenario. As noted above, if this bearish swing is short-lived and price returns above 1.25, we have evidence of EUR-strength. Otherwise, eur-weakness will dominate below 1.25. EUR/USD might remain tentative ahead of the NFP report, so it might not break below 1.2440 unless the ECB actually implements QE or announces that it is seriously considering it.

Now, if the NFP is neutral to strong, the EUR/USD should remain bearish. If it is weak, there might be some reprieve in EUR/USD, but pair should be driven by EUR in this scenario, and unless price shows inability to hold below 1.25, EUR/USD should still be bearish. 1 weak employment report shouldn’t completely reverse the USD from its recent strength.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.