I think few people expected that after such a large correction last Friday, the dollar would lose even its minimal advantage by the end of the month.
Weak labor market data from Germany and inflation data in the Eurozone drove the morning rise in the dollar and the fall in the euro. Employment data reflect the state of the bloc's largest economy, while inflation figures affect expectations regarding the European Central Bank's policy; therefore, their weakness logically weakened the euro at the time. However, the dollar was unable to maintain its gains. As the initial reaction faded, risk appetite returned, and the American currency lost its morning advantage. This led to a recovery for the euro and the pound, as by the end of the day the pressure on risk assets eased, allowing both European currencies to recover previously incurred losses against the dollar.
In the first half of the day today, attention regarding the euro will focus on the July Purchasing Managers' Index (PMI) for the manufacturing sector in Germany and the Eurozone. This indicator is based on surveys of purchasing managers and reflects the state of the industry, with values above 50 indicating sector growth and values below indicating contraction. Since these are revised estimates, the market will primarily monitor how the preliminary data is adjusted, as deviations from the initial figures will prompt a reaction. If the numbers are revised upwards, the euro will have a basis to continue its growth against the dollar. Stronger industrial activity will reinforce confidence in the resilience of the bloc's economy and support expectations of a stringent ECB policy, benefiting the euro. Conversely, a weak revision will dampen bullish sentiment, and the EUR/USD pair risks a correction by the end of the European session.
As for the pound, traders will also focus on the same manufacturing PMI data, but for the UK in July. As noted above, this indicator is also based on surveys of purchasing managers. It reflects the state of the industry, where the 50-point mark divides growth from contraction, and its dynamics directly influence expectations regarding the Bank of England's interest rate. It is expected that the data will be revised upwards, which could provoke new buying of GBP/USD. Stronger industrial activity will bolster confidence in the resilience of the British economy and provide support for the pound against the dollar.
If the data aligns with economists' expectations, it is advisable to act based on the Mean Reversion strategy. If the figures are significantly higher or lower than economists' expectations, it is best to use the Momentum strategy.
Momentum Strategy (Breakout):
For the EUR/USD Pair
- Buy on a breakout of the level 1.1557, which may lead to an increase in the euro towards 1.1592 and 1.1610;
- Sell on a breakout of the level 1.1525, which may lead to a decline in the euro towards 1.1504 and 1.1482;
For the GBP/USD Pair
- Buy on a breakout of the level 1.3500, which may lead to an increase in the pound toward 1.3535 and 1.3585;
- Sell on a breakout of the level 1.3460, which may lead to a decline in the pound toward 1.3435 and 1.3402;
For the USD/JPY Pair
- Buy on a breakout of the level 156.73, which may lead to an increase in the dollar toward 157.05 and 157.40;
- Sell on a breakout of the level 156.33, which may lead to a decline in the dollar toward 155.96 and 155.56;
Mean Reversion Strategy (Return):
For the EUR/USD Pair
- Look for short positions after a failed breakout beyond 1.1552 on a return below this level;
- Look for long positions after a failed breakout beyond 1.1517 on a return to this level;
For the GBP/USD Pair
- Look for shorts after a failed breakout beyond 1.3485 on a return below this level;
- Look for longs after a failed breakout beyond 1.3455 on a return to this level;
For the AUD/USD Pair
- Look for shorts after a failed breakout beyond 0.7050 on a return below this level;
- Look for longs after a failed breakout beyond 0.7028 on a return to this level;
For the USD/CAD Pair
- Look for shorts after a failed breakout beyond 1.4040 on a return below this level;
- Look for longs after a failed breakout beyond 1.4020 on a return to this level;
