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September 16, 2018

EUR/USD Market Overview- (8th-14th September 2018)

The EUR/USD is the most traded foreign exchange pair for all the right reasons. Transacting this pair is an opportunity to trade currencies of the two biggest economies allowing them to get the advantage of the volatility that comes with it. When the economic activities in Europe are healthy, the Euro gains over the dollar. When the economic events in Europe are low, the Euro loses value to the dollar. The same case applies to the dollar and the American economy. Here are some of the factors that affect the EUR/USD:
One needs to know when to expect high volatility and when to expect low volatility.  The pair is normally traded in low volumes during the Asian session. The volatility is highest during the American and European sessions.
Key institutions and personalities
The EUR/USD is mostly affected by the central bank of both the US and the European Union.  The two central banks make critical monetary policy, money supply, and interest rates decisions that affect the pair. 
Political environment
Any political issue affecting Europe or any of Europe’s big economy affects the pair. The recent Brexit or European crises have a significant impact on the EUR/USD. Views by key political figures too may affect the two currencies. Elections and change of political standing in the US have also affected the EUR/US In the past.
Economic Reports
Every week the economic calendar lists some of the financial reports to be released in a particular week. We will focus on a few but the most important of the economic reports.
CPI (consumer price index) it is a measure of the economic health of an economy. It indicates the state of the inflation
GDP (Gross domestic product) shows the strength of the economy 
PMI shows if the purchasing managers are more confident about the economy in the medium term.
Interest rates
Economic theories have it that there is a high correlation between interest rates and the exchanges rates. This is called the Fisher effect, whereby currencies fall and rise in accordance with interest rates. If the interest rates of the US are high, then the dollar will be stronger than the Euro. Conversely, high-interest rates in Europe leads to a strong Euro.
Fundamental overview
The EUR/USD dropped sharply during last Friday US session after a strong US dollar towards the end of the week.  By the end of Friday, EUR/USD was down 90 pips down the day’s high hovering at around 1.1560. The US dollar came out strongly, especially after the strong US employment data. The NFP headline was a little bit above expectations, but the positive surprise growth is what pulled a surprise on the market. The US yields were up further strengthening the greenback

Significant events likely to shape the pair include the looming price wars as announced by the US president this week.  The price wars directed to China, Japan and all former US allies is something to watch closely as it unfolds.

The current headline indicates that the Brexit chief negotiator said that it is realistic that a deal may be reached in two months’ time. The news is likely to have a downward push for the Euro in the next few months. Still, in Europe, the EU released the Sentix investor confidence index that showed a decline to 12 from 14.7 falling below the expected 14.6.
The Germans will be releasing the ZEW survey on the economic sentiments this September. The US will, on the other hand, be releasing the Wholesale Inventories and the JOLTs jobs report. These are not major economic news and therefore not so much is expected as a result.
The dollar weakened on Monday as the expected Federal Reserve rate hike was overshadowed by the looming trade wars. In the meantime, the trade wars between China and the US are likely to continue after US president warned he was going to impose tariffs on goods worth $267 billion in addition to the $200 billion earlier promised. China is expected to retaliate against any move by Trump to introduce taxes. 
Technical Analysis
Daily Outlook 
The pair tested and breached the 1.1529 support level before quickly recovering. The rebound we see from 1.1300 is a correction of the market. In case of any further rise, we expect to see strong resistance at the 38.2% retracement of around 1.2556 to around 1.1300 at the 1.1780 to limit upside on the first attempt. On the downside, a break of the 1.1529 will indicate an end to the rebound, and the bias will be down until we test the 1.1300. In general, we expect the correction to continue in the meantime, maintaining an overall bullish trend.

On a broader perspective, the medium term low should be at 1.1300; on bullish convergence conditions on MACD, some consolidation would likely be seen. It is, however, worth noting that this pair was rejected by a 38.2% retracement of 1.6040, which was 2008 highest to 1.034 at 1.2516 that was 2017 low. We, therefore, expect a fall from 1.2555 to resume after the consolidation. If it falls below 1.1300, EUR/USD would then go all the way to the 61.8% retracement of 1.0340 to 1.1185 where the pair would retest the 2008 low at 1.0339.

Weekly Outlook

The EUR/USD dipped last week before being contained at the support level 1.1529. Price action from 1.1300 is a correction of the market conditions. We expect to see extreme resistance at 38.2% retracement of 1.2555 to 1.1300 at 1.1780 if the prices keep on rising. On the downside, if the price breaks 1.1529, it will be an indication of the completion of the rebound and will likely test the 1.1300. 

Article was written by Rakuten Forex Broker.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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