Fed Cut Priced In, Election Adds Uncertainty to Market
Textbook S/R Reaction Caps EUR/USD at 1.0900, Gap Closure Probable
The U.S. Non-Farm Payrolls report came in much lower than anticipated, showing that only 12,000 jobs were added as opposed to the anticipated 106K and the previous 223K. The report reading has been skewed by hurricanes that devastated the U.S. but also by strikes initiated by aerospace factory workers.
The Unemployment Rate held steady at 4.1% and the Average Hourly Earnings jumped to 0.4% from the previous 0.3%. The report did nothing to deter the Fed from cutting the rate this week, as shown by the CME FedWatch tool which has the probability of a 25 bps rate cut at 100%.
But while the rate outcome may be already priced into the market, the same cannot be said about the U.S. Presidential race which seems to be heating up. A new poll in Iowa revealed that Democratic candidate Kamala Harris is leading the race by 3 points in the state. This is a major change from just a few weeks back and it’s particularly important because this poll has a good track record in the swing states. No matter the outcome of the election, the market is poised for irregular movement this week.
Economic Calendar Highlights
The ISM Services PMI will be released Tuesday at 3:00 pm GMT but will probably be overshadowed by the U.S. Presidential Election that takes place the same day. The greenback may shift during the day, depending on the results that will be coming in. Also, if we don’t get a definitive result (controversy has been known to surround the U.S. election), the charts may react with jerky movement.
Thursday we have two major rate announcements: the Bank of England is expected to cut the rate from 5.00% to 4.75% at 12:00 pm GMT and the Federal Reserve is likely to do the same thing at 7:00 pm GMT. The probability of a Fed cut is 100%, so the reaction is largely priced in, which means that we may see smooth charts unless surprises happen. At 7:30 pm GMT, Fed Chair Powell will hold the usual press conference, which may offer clues about the next steps.
Technical Outlook – EUR/USD
Since the pair touched the support at 1.0775, it travelled straight up into the resistance at 1.0900, which stopped the bullish momentum. The price showed a textbook reaction to S/R levels, bouncing perfectly between them.
Monday’s open saw a relatively large price gap: last week closed at 1.0830 and this week opened at 1.0875. Historically, price gaps are closed, meaning that the price travels to the place where the gap originated. In this case, it means that the pair may travel to 1.0830 to close the gap.
Although this is not a certainty, there is a high probability of a drop to the mentioned zone, but the exact time when that may happen is unknown. Keep in mind that the U.S. Election and the Fed rate announcement can create jerky and irregular movement.
