The euro and pound are gradually returning to growth against the dollar in hopes of continuing their bullish trends formed last week.
Yesterday, the dollar lacked support as U.S. data were uninspiring, offering no reason to buy. The labor market in June was effectively in equilibrium, with the JOLTs report showing that job openings totaled 7.4 million, hires totaled 5.3 million, and layoffs totaled 5.4 million. All these values remained almost unchanged, with no clear signs of either cooling or overheating. The JOLTs data are significant because the Federal Reserve uses them to assess labor market tightness, and such stability deprived the dollar of a distinct impulse.
A similar mixed signal came from the manufacturing sector. New orders declined for the second consecutive month, down 0.3% to $656.5 billion, but the backlog of unfilled orders continued to grow for the 23rd time, reaching a record $1,590.6 billion. This ambiguity did not provide the dollar with further justification, leaving it without support. For the euro and pound, the absence of dollar support became a tailwind. The weakness of the U.S. dollar allowed both European currencies to stabilize and appreciate, with EUR/USD and GBP/USD regaining ground. As long as the data did not give the Fed reasons for tightening, the initiative remained with risk assets.
Today, in the first half of the day, attention to the euro will focus on the services sector business activity index, the composite PMI index, and the June producer price report. The PMIs are based on surveys of companies and reflect the state of business activity, with the 50-point mark separating growth and decline. The services sector accounts for the largest share of the bloc’s economy, while the composite index combines services and industry, providing a more complete picture. The producer price index, in turn, tracks wholesale prices and serves as an early signal of inflationary pressure that eventually translates into consumer prices.
Through these channels, the reports affect expectations regarding the European Central Bank’s policy and, therefore, the euro’s exchange rate. Strong business activity, combined with sustained price pressure, will support arguments for a hawkish stance by the central bank and bolster the single currency, potentially allowing the EUR/USD pair to continue rising. Conversely, weak data would cool sentiment and return the euro to a restrained dynamic until the end of the European session.
Similar data is being released for the UK. The services index is considered one of the most important benchmarks for the British currency, as the services sector makes up the bulk of the country’s economy, and the composite indicator combines services and industry, providing a more complete view of business activity. Both indices are leading indicators, as they are the first to capture shifts in business sentiment and, through expectations regarding the Bank of England’s policy, also influence the pound’s exchange rate. Strong data could give the pound an impetus for further growth against the dollar, confirming the economy’s resilience and strengthening the case for a hawkish stance by the regulator. Until the data is released, the GBP/USD pair is likely to remain cautiously positive in anticipation of confirmation.
If the data aligns with economists’ expectations, it’s best to act based on the Mean Reversion strategy. If the figures are significantly above or below economists’ expectations, the Momentum strategy is preferable.
Momentum Strategy (Breakout):
For the EUR/USD Pair
Long positions on a breakout above 1.1557 may lead to an increase in the euro to around 1.1592 and 1.1620;
Short positions on a breakout below 1.1528 may lead to a decline in the euro to around 1.1504 and 1.1482;
For the GBP/USD Pair
Longs on a breakout above 1.3468 may lead to an increase in the pound to around 1.3498 and 1.3539;
Shorts on a breakout below 1.3444 may lead to a decline in the pound to around 1.3419 and 1.3393;
For the USD/JPY Pair
Longs on a breakout above 157.69 may lead to an increase in the dollar to around 157.93 and 158.28;
Shorts on a breakout below 157.40 may lead to a sell-off of the dollar to around 157.05 and 156.73;
Mean Reversion Strategy:
For the EUR/USD Pair
I will look for shorts after a failed breakout above 1.1547 upon returning below this level;
I will look for longs after a failed breakout below 1.1523 upon returning to this level;
For the GBP/USD Pair
I will look for shorts after a failed breakout above 1.3465 upon returning below this level;
I will look for longs after a failed breakout below 1.3439 upon returning to this level;
For the AUD/USD Pair
I will look for shorts after a failed breakout above 0.7062 upon returning below this level;
I will look for longs after a failed breakout below 0.7038 upon returning to this level;
For the USD/CAD Pair
I will look for shorts after a failed breakout above 1.4078 upon returning below this level;
I will look for longs after a failed breakout below 1.4059 upon returning to this level;
