EUR/USD set to break 4-month losing streak ahead of ECB: The Week Ahead

Standout events for next week’s calendar include ISM reports for US business sentiment, nonfarm payrolls and an ECB meeting. And that places EUR/USD onto the radar for currency traders, which is currently on track to snap a four-month losing streak. But we also have an OPEC+ meeting on Sunday which leaves the potential for weekend gap risks. CAD pairs will also be on the radar to see if the BOC take the plunge and become the first major central bank to cut rates and steal the tile from the ECB by a day.

The week ahead (calendar):

The week ahead (key themes and events)

• Nonfarm payroll
• ECB meeting
• ISM PMIs
• BOC meeting
• OPEC+ meeting

OPEC+ meeting

Crude oil rose over 3% on Tuesday on reports that OPEC+ planned to extend their oil output cut. Yet those gains were fully reversed by Thursday’s close following downwardly revised growth figures for the US which dented demand expectations, alongside concerns of oversupply. OPEC+ are set to hold their meeting in Austria on Sunday and likely to have concluded by the Asian open on Monday, which leaves the potential for weekend gap risk should OPEC surprise+ by either extending production cuts for longer than expected or cutting production further, which could send crude oil higher.

Trader’s watchlist: WTI crude oil, brent, energy stocks, XLE (SPDR energy sector)

ISM PMIs in focus after hot S&P global services report

The ISM survey can be seen as the original PMI and has long been regarded as the key indicator to monitor the US (and therefore global) business cycle. Yet in recent years, the S&P Global PMI has introduced its flash PMI ahead of the ISM report to make it more relevant. And it seems to have worked.

Wall Street and gold tumbled while the US dollar and yields rose following a hot services PMI report from S&P Global. While headline ISM figures dipped into contraction in April, the 'prices paid' component of services rose at its fastest pace since June 2022. This translates to inflationary pressures and higher-for-longer Fed rates. If the S&P PMIs lead the ISM higher, it could spell further trouble for risk appetite, especially if this is backed up with higher 'prices paid' components and a decent set of Nonfarm Payroll figures on Friday.

Trader’s watchlist: USD, EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones, VIX, bonds, yields

BOC meeting:

16 out of 26 (62%) of economists surveyed by Bloomberg expect the BOC could cut by 25bp next week, to 4.75% from 5%. There is a reasonable chance for them to do so with inflation pressures clearly on the decline and key inflation measures now all within their 1-3% target band. But will this be enough for them to pull the trigger first among major central banks?

In the past couple of weeks we have seen the BOE’s case for a June cut blown out of the water with hot inflation figures and the ECB send mixed signals about any action beyond June’s anticipate cut. And that is likely to be in the back of policy markers minds when they decide whether to ‘go first’ and cut in May.

There is certainly a case to signal a cut. And even if they do next week, I doubt they’ll have the appetite to signal further cuts. And that could leave the potential for CAD strength (USD/CAD weakness).

Trader’s watchlist: USD/CAD, CAD/JPY, NZD/CAD

ECB meeting:

The ECB are fully expected to cut interest rates by 25bp next week, which immediately renders the action itself as a non-event. Yet not so long ago, expectations for a second or third cut this year were on the rise. Unfortunately, mixed data has muddied the water of subsequent action, placing greater emphasis on any forward guidance.

We’ve had some mixed messages from ECB officials this past week, which to me suggests they won’t reveal too much of their future intentions when they cut rate next week.

Trader’s watchlist: EUR/USD, EUR/GBP, EUR/JPY, DAX 40, CAC 40, STOXX 50

EUR/USD technical analysis:

Looking at the monthly chart, EUR/USD has not exceeded a 4-month losing streak since May 2019. Yet there has been three prior occurrences of 4-month losses in November 2021, May 2022 and September 2022, all of which formed during the 22% bear market between the 2021 high and 2022 low. And it was the most recent that went on to achieve more than a 1-month rally, going on to rise for four consecutive months. Unfortunately, it is hard to construct a case for another three months of gains on the euro without the Fed signalling cuts.

Ultimately, the 4-month decline has seen prices mostly remain within a 400-pip range between 1.06 to 1.10, and we really need a divergent theme between the ECB and Fed before can expect a break out of it.

The weekly chart shows the EUR/USD in on track for a second consecutive down week, although support has been found at the 50-week EMA. If the ECB remain tight-lipped about future cuts as expected, and incoming ISM and NFP reports are not as weak as hoped, then a break of this week’s low seems likely. Although keep in mind we’re waiting for incoming PCE data on Friday too.

1-week implied volatility suggests a 66% chance EUR/USD will close between 1.0750 – 1.09 next week, and with a double top around 1.0890, my guess it could be the lower ed of that range.

Nonfarm payroll (NFP):

At 175k, job growth was its lowest in six months according to the latest NFP report. Unemployment also rose 3.9%, to match its 2-year high set in February. Naturally, this excited traders looking to price in Fed cuts and sent the USD index ~0.8% lower from the high of the day, even if the dollar went on to side again over the next three days. But it serves as a reminder as to how much emphasis traders place on these job figures. And if we’re to see another drop in jobs, unemployment to hit 4% or higher next week alongside a softer PCE inflation report this week, then the dollar could once again find itself in a spot of trouble.

Trader’s watchlist: EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones, VIX, bonds, yields

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge