Forex Market: EUR/USD daily trading forecast

Friday’s trade saw EUR/USD within the range of 1.1149-1.1319. The pair closed at 1.1211, up 0.14% on a daily basis, while extending gains from Thursday. The daily high has been the highest level since September 21st, when the cross registered a high of 1.1333. In weekly terms, EUR/USD went up 0.14%, marking its first gain in the past three weeks, following a 0.97% slump in the week ended on September 22nd.

At 6:50 GMT today EUR/USD was gaining 0.21% for the day to trade at 1.1235. The pair traded in proximity to the range resistance level (R3), as it touched a daily high at 1.1247 at 2:15 GMT.

Today the cross may be influenced by a number of macroeconomic reports as listed below.

Fundamentals

Euro area

Services sector data by Markit

Frances final services PMI probably confirmed the preliminary PMI reading of 51.2 in September, which was reported on September 23rd. If so, September would be the eighth consecutive month, when the PMI stood in the zone of expansion. In August the final services PMI was estimated at 50.6, or the lowest level since January 2015. The final reading is due out at 7:50 GMT.

The final reading of German services PMI probably confirmed the preliminary value for September, with the index coming in at 54.3, according to market expectations. If confirmed, September would be the 28th consecutive month, when the services PMI stood above the 50.0 level. In August the final services PMI was registered at 54.9, or the highest since March 2015. The index is based on data collected from a representative panel of more than 500 companies, operating in Germanys services sector, and gauges variables such as sales, employment, inventories and prices. Markit will release the final reading at 7:55 GMT.

The final services PMI in the Euro area probably also confirmed the preliminary value for September, with the index remaining at 54.0. If so, this would be the 26th straight month of activity expansion. In August the index came in at 54.4, according to final data, up from a preliminary reading of 54.3. The Purchasing Managers Index is based on a monthly survey, encompassing a sample of approximately 2 000 business entities, which represents private sector conditions in terms of new orders, output, employment, prices etc. National services data are included for Germany, France, Italy, Spain and the Republic of Ireland. Readings above the key level of 50.0 indicate optimism (increasing activity). Higher-than-expected values of any of the above mentioned PMIs would support demand for the common currency. The final reading for the Euro region is scheduled to be released at 8:00 GMT.

Sentix Investor Confidence Index

Confidence among investors in the Euro zone probably worsened for a third straight month in October, with the corresponding index coming in at a reading of 11.6. If so, October would be the tenth consecutive month, during which the gauge occupied positive territory. However, it would also be the lowest reading since January 2015, when a value of 0.9 was reported. In September the gauge stood at 13.6. The index is based on results from the SENTIX survey, one of the most prominent surveys, reflecting investors’ opinion in Germany. It encompasses 2 800 respondents, with 510 of them being institutional investors. Respondents present their expectations regarding ten different markets for a period of one and six months. Readings above zero indicate that respondents were predominantly optimistic, while readings below zero show pessimism. Lower-than-expected readings would have a limited bearish effect on the common currency. The official index value is due out at 8:30 GMT.

Retail Sales

Annualized retail sales in the Euro region as a whole probably rose 1.8% in August, according to the median forecast by experts, after in July sales climbed at a pace of 2.7%. The latter has been the sharpest annual increase since February, when sales rose 3.0%. If expectations were met, August would be the 20th consecutive period of growth. In monthly terms, retail sales probably remained flat during August, following a 0.4% increase in July. This is a short-term indicator, which provides key information about consumer spending trend on a national scale. In case the index of retail sales rose at a faster-than-projected pace, this would have a moderate bullish effect on the euro. Eurostat is expected to publish the official data at 9:00 GMT.

United States

Services PMI by Markit – final estimate

The final Services Purchasing Managers Index probably confirmed the preliminary value for September at 55.6, reported on September 25th. If so, this would be the lowest index reading since June, when the PMI was reported at a final 54.8. In August the final seasonally adjusted index stood at 56.1. The PMI is based on data collected from a representative panel of more than 400 private sector companies, which encompasses industries such as transport and communication, financial intermediaries, business and personal services, computing & IT and hotels and restaurants. Values above the key level of 50.0 indicate optimism (expanding activity). In case, however, a larger-than-projected slowdown in services sector activity was reported, this would have a moderate bearish effect on the US dollar. The final data by Markit Economics is due out at 13:45 GMT.

ISM Non-Manufacturing PMI

Activity in United States’ sector of services probably slowed down for a second straight month in September, with the corresponding non-manufacturing PMI coming in at a reading of 58.1, according to the median forecast by experts, down from 59.0 in August. If expectations were met, September would be the 69th consecutive month, when the gauge stood in the area above 50.0, but however, it would be the lowest index reading since June, when a value of 56.0 was reported. The PMI is a compound index, based on the values of four equally-weighted components, which comprise it. These sub-indexes reflect seasonally adjusted new orders, seasonally adjusted employment, seasonally adjusted business activity and supplier deliveries.

The New Orders Index stood at 63.4 in August, down from a reading of 63.8 in the prior month. The Employment Index slipped to 56.0 in August from 59.6 in July, while marking growth for the 18th month in a row, according to data by the Institute for Supply Management (ISM). The Prices Index slid to 50.8 in August from 53.7 in July, which indicated prices rose for a sixth straight month. The Non-Manufacturing Business Activity Index fell to 63.9 in August from 64.9 in July, indicating growth for a 73rd straight month.

Among the 17 services industries, 15 reported growth in August, 1 reported contraction and 1 reported no change in conditions.

In case the PMI slowed down at a larger rate than anticipated, this would lead to a heavy sell-off of the US dollar. The Institute for Supply Management (ISM) is to release the official PMI value at 14:00 GMT.

Correlation with other Majors

Taking into account the week ended on October 4th and the daily closing levels of the major currency pairs, we come to the following conclusions in regard to the strength of relationship:

EUR/USD to GBP/USD (0.5949, or strong)
EUR/USD to USD/CAD (0.5647, or strong)
EUR/USD to USD/CHF (-0.3673, or moderate)
EUR/USD to USD/JPY (-0.4194, or moderate)
EUR/USD to NZD/USD (-0.6722, or strong)
EUR/USD to AUD/USD (-0.7014, or strong)

1. During the examined period EUR/USD moved strongly in one and the same direction with GBP/USD and USD/CAD, while moving strongly in the opposite direction compared to NZD/USD and AUD/USD.

2. The correlation between EUR/USD and USD/CHF, EUR/USD and USD/JPY was moderate during the past week.

Bond Yield Spread

The yield on German 2-year government bonds went as high as -0.251% on October 2nd, after which it slid to -0.269% at the close to lose 0.004 percentage point on a daily basis, while marking a second straight trading day of decrease.

The yield on US 2-year government bonds climbed as high as 0.680% on October 2nd, or the highest level since September 29th (0.684%), after which it fell to 0.581% at the close to lose 6.8 basis points (0.068 percentage point) for the day. It has been the fourth drop in the past five trading days.

The spread between 2-year US and 2-year German bond yields, which reflects the flow of funds in a short term, shrank to 0.850% on October 2nd from 0.914% during the prior day. The October 2nd yield spread has been the lowest one since August 25th, when the difference was 0.833%.

Meanwhile, the yield on German 10-year government bonds soared as high as 0.576% on October 2nd, after which it slid to 0.516% at the close to lose 2.6 basis points (0.026 percentage point) compared to October 1st, while marking a second straight day of decline.

The yield on US 10-year government bonds climbed as high as 2.065% on October 2nd, after which it slipped to 1.991% at the close to lose 5.1 basis points (0.051 percentage point) compared to October 1st. It has been the fourth drop in the past five trading days.

The spread between 10-year US and 10-year German bond yields narrowed to 1.475% on October 2nd from 1.500% during the prior day. The October 2nd yield difference has been the lowest one since September 30th, when the spread was 1.445%.