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The US dollar tumbled after weaker-than-expected nonfarm payrolls in September.

The pair has struggled to bounce back over the past few weeks. The break below 1.2500, a major demand zone on the daily chart, is the straw that broke the camel’s back. 1.2430 is the next support. And its breach could trigger an extended sell-off towards July’s low at 1.2300.

As buyers bail out, high volatility has pushed the RSI into the oversold territory. A bounce is likely to be capped by 1.2600, and it could be an opportunity to sell into strength.

Markets

US payrolls were supposed to remove the final hurdle for the Fed to announce bond tapering at the November 3 meeting. Fed Powell recently indicated that an OK report would pull the trigger. The report in the first place was misty and complicated. Headline payrolls missed the consensus by a big margin (194k vs 500k expected). However, an upward revision for the previous two months (169k) and a sharp decline in government education employment being distorted by seasonal adjustment issues, suggest the underlying picture of the labour market was better than indicated by the headline figure. A decline in the unemployment rate from 5.2% to 4.8% and weekly hourly earnings rising to 4.6% Y/Y also suggest that the ‘pre-announced’ start of tapering shouldn’t be delayed. The instant Treasury reaction mainly showed hesitation, but US yields soon resumed their trip north with several maturities clearing next technical references. Persistent high oil/energy prices supported the upward yield dynamics/higher inflation expectations. US yields rose 3.7/3.8bp for the 5-30-y sector of the curve, with the 10-y clearing the 1.60% barrier. European yields joined the move in the US with German yields rising between 1.3 and 3.4 bp. In this respect, European yields are now also reaching important crossroads with the 10-y swap (0.23%) testing the February 2020 top/38% retracement since February 2018. The German 10-y is testing the -0.15% area, the final resistance ahead of the -0.07% post-corona top. US equities finished marginally softer. The trade-weighted dollar lost marginal ground (94.06). EUR/USD gained a few ticks (close 1.1569). The rise in US and German yields made the yen a distinct underperformer with USD/JPY jumping to 112.24 (from 111.63) and EUR/JPY closing at 129.86 (from 128.94).

Asian equities show a mixed picture with China and Japan outperforming. The sell-off of the yen continues unabatedly (USD/JPY 112.70, EUR/JPY 130.40). US bond markets today are closed in observance of Columbus Day. Several ECB members are scheduled to speak including ECB’s Lane and Villeroy. Of late they didn’t really change their assessment on the temporary nature of inflation. Even so, markets apparently take a different view with European interest rate markets testing key technical levels (cf supra). A further rise of EMU inflation expectations might be food for further thought at the ECB. EUR/USD isn’t out of the woods, but at least the decline slowed at the end of last week. Will a rebound of EUR/JPY help this bottoming out process? EUR/USD 1.1529/1.1495 remains key. This weekend, both BoE’s Saunders and BOE governor Bailey fueled market expectations on an early BoE rate hike. Saunders said markets were right to do so. Bailey warned on the damaging effects inflation for consumers. Sterling is picking up the message. EUR/GBP (currently near 0.8485) is nearing in the key 0.8450 support.

News headlines

The Czech opposition secured a majority of the seats at the 2021 parliamentary elections last weekend. The Together coalition with the PirStan coalition (Pirates Party + STAN) were on track for 108 of the 200 seats. This compares to the 68 the group of five parties won in 2017. The leader of Together, Fiala, and Bartos of the Pirates Party both said that their groups had a chance to form a government and oust incumbent PM Babis and his ANO party. ANO was on its way to win 72 seats (vs 78 in 2017). Being still the biggest single party, ANO will probably be given the first chance by the president to form a government. However, Together and PirStan already ruled out working with Babis while the PM’s previous allies, the Social Democrats and Communists, failed to retain any seats. The Czech krone is holding steady around EUR/CZK 25.44 this morning.

Austrian chancellor Sebastian Kurz announced his resignation on Saturday. Kurz was a suspect in a corruption investigation in which he allegedly misused taxpayer money to buy positive media coverage during his time as a foreign minister in 2013-2017. Current foreign minister Schallenberg will take over while Kurz keeps his seat in the cabinet. Kurz’ position was becoming unsustainable after his government partners, the Greens, were contemplating to form their own coalition just to oust him. On Tuesday, the government might face a motion of no confidence tabled by the opposition. If it passes, early elections are due.

EUR/USD

Current level - 1.1571

The currency pair is trading in the narrow range between 1.1535 - 1.1600 and the downward move is possible to continue, although the bulls have thus far managed to limit the sell-off to the support level of 1.1535 in the middle of last week. If the bears dominate the market during this week as well and the aforementioned support is successfully breached, we can expect a move towards the next significant support of 1.1400. The U.S. consumer price index data (Wednesday; 12:30 GMT), as well as the U.S. retail sales data (Friday; 12:30 GMT) will be on investor's focus this week and the outcome of both reports will be one of the main factors to influence the future of the currency pair.

USD/JPY

Current level - 112.46

The appreciation of the U.S. dollar against the Japanese yen continued in the early hours of today's trading session. The breach of the resistance of 112.00 has managed to give the bulls enough momentum and, at the time of writing the analysis, the Ninja is trading at 112.48. The next significant resistance before the bulls is the level of 113.60, followed by 114.50. The news, mentioned in the EUR/USD analysis, is expected to have an impact on the volatility of the currency pair.

GBP/USD

Current level - 1.3641

The pound continues to rise against the U.S. dollar and, at the time of writing, the currency pair is facing a test of the resistance zone of 1.3640. A successful breach here could give the bulls the necessary incentive for a test of the next resistance of 1.3713. On the other hand, an unsuccessful breach of the resistance here could intensify the negative sentiment and lead the movement towards the first significant support of 1.3583. The announcement of the Claimant Count unemployment change data for the UK (Tuesday; 06:00 GMT), as well as the manufacturing production data (Wednesday; 06:00 GMT) is expected to lead to an increased volatility.

On Friday, the US Dollar edged lower by 94 pips or 0.75% against the Canadian Dollar. The currency pair breached the support level at 1.2550 during Friday's trading session.

The exchange rate is currently trading near the lower boundary of a descending channel pattern at 1.2457.

If the channel pattern holds, buyers could pressure the USD/CAD pair towards the 1.2550 level within this session.

However, if the currency exchange rate breaks the descending channel pattern, the next target for sellers will be near the 1.2400 area.

On Friday, the British Pound surged by 82 pips or 0.54% against the Japanese Yen. The currency pair was pressured higher by the 50– hour simple moving average during Friday's trading session.

Given that the exchange rate has breached the upper line of an ascending channel pattern, bullish traders are likely to continue to pressure the GBP/JPY pair higher during the following trading session.

However, buyers could encounter resistance at 153.85 within Monday's trading session.

During the first half of Friday's trading session, the Australian Dollar surged by 0.51% against the US Dollar. However, the currency pair erased the earlier gains at the end of the day.

Given that the exchange rate has bounced off a support level formed by the 50– hour simple moving average at 0.7305, bullish traders could drive the AUD/USD pair higher during the following trading session.

But, the resistance level at 0.7327 could provide resistance for the currency exchange rate within this session.

On Friday, the common European currency edged higher by 83 pips or 0.64% against the Japanese Yen. The currency pair breached the resistance level at 129.50 during Friday's trading session.

All things being equal, the exchange rate could continue to trend higher during the following trading session. The potential target for the EUR/JPY pair will be near the 131.50 area.

However, the currency exchange rate may encounter resistance at 130.73 within this session.

Daily Pivots: (S1) 1.1549; (P) 1.1568; (R1) 1.1593; More...

Intraday bias in EUR/USD remains neutral for the moment, but further fall is still in favor as long as 1.1639 minor resistance holds. Break of 1.1528 will resume larger decline towards 1.1289 medium term fibonacci level. On the upside, break of 1.1639 resistance, however, will indicate short term bottoming. intraday bias will be turned back to the upside for stronger rebound.

In the bigger picture, sustained break of 1.1602 will argue that rise from 1.0635 (2020 low) has completed at 1.2348. Deeper fall would be seen to 61.8% retracement of 1.0635 to 1.2348 at 1.1289. Note also that rejection by 55 week EMA (1.1830) also carries medium term bearish implication. Firm break of 1.1289 will pave the way to retest 1.0635 low. On the upside, though, break of 1.1908 resistance will revive medium term bullishness and turn focus back to 1.2348 high.

Daily Pivots: (S1) 1.3583; (P) 1.3620; (R1) 1.3657; More...

Intraday bias in GBP/USD remains on the upside with 1.3542 minor support intact. Sustained trading above 55 day EMA (now at 1.3725) will target 1.3912 key near term resistance. On the downside, below 1.3542 minor support will retain near term bearishness, and turn bias back to the downside for 1.3410 low.

In the bigger picture, fall from 1.4248 is at least a correction to the up trend from 1.1409 (2020 low). Such correction could extend to 38.2% retracement of 1.1409 to 1.4248 at 1.3164 before completion. However, considering the rejection by 1.4376 key resistance (2018 high), sustained trading below 1.3164 will argue that it's indeed a bearish trend reversal and would target 61.8% retracement at 1.2493. Nevertheless, break of 1.3912 resistance will revive medium term bullishness and target 1.4248/4376 resistance zone again.

Daily Pivots: (S1) 0.9264; (P) 0.9279; (R1) 0.9304; More....

Intraday bias in USD/CHF remains neutral as consolidation form 0.9367 is still extending. On the upside, break of 0.9367 will resume the rise from 0.8925 to 0.9471 key resistance next. On the downside, however, break of 0.9214 will turn bias back to the downside for 0.9017 support again.

In the bigger picture, the strong rally above 55 week EMA (now at 0.9188) now tilts favor to the case of bullish trend reversal. That is, decline from 1.3042 (2016 high) is probably completed at 0.8756 already. Sustained break of 0.9471 resistance should confirm this case and pave the way to retest 1.0342 ahead. However, rejection by 0.9471 will mix up the outlook again and retain some medium term bearishness.