The Euro/U.S. dollar (EUR/USD) currency has rallied sharply this week, thanks mainly to a slump in U.S. dollar as opinion polls narrowed and uncertainty about the U.S. elections grew after the FBI announced at the end of last week that it will launch an investigation into Hillary Clinton’s e-mails.
However, we believe that the dollar could make a comeback next week if, despite all the shenanigans, Hillary Clinton becomes the next U.S. president. If that were to happen, the Fed will most likely raise interest rates in December before slowly tightening its policy further in the years ahead.
Indeed, incoming economic data from the United States continues to improve at a steady pace, as indicated for example by the nonfarm payrolls report for the month of October. Although the headline jobs growth at 161 thousand was far from being great, we was sharp upward revisions to the previous months’ job gains and more importantly a stronger-than-expected rise in average earnings.
Obviously if Donald Trump scores a shock victory in the U.S. presidential election race next week then the dollar could fall a lot further in the short-term outlook. That is the key risk in our opinion.
But from a purely technical perspective, the EUR/USD’s short-squeeze rally could come to an end next week as it tests or nears key resistance levels.
The world’s most heavily-traded currency pair has been making lower lows and lower highs inside its nearly two-year consolidation pattern. So, the medium-term trend is arguably still bearish. This week’s counter-trend rally to the prior key support, now resistance, at 1.1125 area could be where the sellers might step back in. Here we also have the 50-day moving average and a 61.8% Fibonacci retracement level converging with price.
If the sellers do not step in here then they may do so around the 1.1180/1200 area, where the 200-day average meets the bearish trend line and the 78.6% Fibonacci level. However if this area also breaks down then this bearish outlook will become invalid. Assuming that doesn’t happen, the next potential key support levels, or bearish objectives, to watch include 1.1065, 1.1040, 1.0935 and 1.0825/55. These levels were previously support and/or resistance.