EUR/USD could reclaim 1.11 if ISM manufacturing sinks further

ISM manufacturing data is released today for August, and I’m intrigued to see if we see a further deterioration in the sector. If so, it could bolster EUR/USD for a cheeky run for 1.11, even if the weekly timeframe looks like it can still move lower beyond any such bounce.

Last month I noted that the report contained some of the most deflationary and pre-recessionary comments I had seen from respondents in quite some time.

The headline ISM figure of 46.8 marked its fastest pace of contraction in eight months, new orders also contracted. But perhaps more worryingly, the employment component tanked at its fastest pace since June 2020. Given markets are on high alert for weaker employment data ahead of Friday’s NFP, it might have an amplified effect on sentiment should employment tank further.

However, the ISM services report on Wednesday could carry more weight on the even of NFP. Especially if it contracts alongside manufacturing. However, perhaps the bigger potential move for the USD this week is if incoming data surprises to the upside overall. ISM services did just that last month, expanding at 51.4.

Ultimately, the euros direction likely lays in the hands of incoming US data. Where a rally for EUR/USD likely requires US data to come in softer than expected, whereas bears need it to come in weaker than expected.

EUR/USD technical analysis:

The euro’s rally came failed to hold above the December high last week, which saw the pair form a two-week bearish reversal pattern (dark cloud cover). The prior week’s high also coincided with the RSI (14) reaching overbought. If US data does outperform expectations relative to that of the eurozone’s, we could be looking at a lower EUR/USD over the coming weeks – even if it is simply part of a retracement lower before EUR/USD has another crack at 1.13.

However, the daily chart appears primed for at least a small bounce. Monday’s small bullish candle formed part of a 2-bart bullish reversal (piercing line), around a 38.2% Fibonacci level and 20-day EMA. Prices are holding within the upper half of Monday’s range which further suggests demand above Monday’s low. Bulls could seek longs within Monday’s range for an initial move up to 1.1100.

We could then revisit its potential to extend gains, or form a swing high as part of a deeper countertrend correction.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge