EUR/USD rallied in early day trading on Tuesday as the dollar weakened against most of its major counterparts. The currency pair is on pace to post a daily gain to snap a prior five-day losing streak. The euro was the second strongest currency in European trading today, lagging only the Australian dollar. The single currency rallied about half a cent from support found at 1.1553 prior to pulling back following a failed breach of the 1.1600 handle. EUR/USD had turned lower last week after the fourth failure at 1.1741 resistance and declined to a low of 1.1530 shortly after the U.S. jobs report on Friday, falling slightly short of retesting support at 1.1510, which has been holding the pair higher over the past few months.
From a broader perspective, the exchange rate has been trading within a consolidation since mid-May, similar to the inversely correlated U.S. dollar index (DXY). Last week, U.S. employment data failed to elicit a range break, with the unemployment rate declining to 3.9% and average hourly earnings rising 0.3%, both as expected, while the headline increase fell short with 157,000 jobs added in July versus an expected 191,000. This week, the focus in terms of U.S. economic data will be on inflation data, with the latest consumer price index (CPI) figures scheduled for release on Friday. Analysts are expecting year-over-year CPI to remain unchanged at 2.9%.
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Similar to EUR/USD, DXY is holding within a range and is seen turning lower from range resistance. However, overhead resistance is much more prominent in the index when compared to the exchange rate, as a horizontal level at 95.50 has now capped rallies four times. Although this emphasizes the strength of the level, it is also a sign of persistence among dollar bulls. In addition to horizontal resistance, the 100- and 200-period weekly moving averages are in play and creating a confluence of resistance. In this context, an upside sustained breach is likely to accelerate bullish sentiment, especially when considering the length of time of the range and the stops that have likely been built up above 95.50.
The latest Commitment of Traders report revealed a draw in net bullish euro positioning to 23,000 contracts, which is near a two-year low for the single currency and considerably lower from this year's high of 152,000 contracts. Net long dollar positioning declined a bit for the first time in seven weeks as speculators scaled back on short positioning in the Japanese yen and Canadian dollar.
Tuesday's daily close in EUR/USD will be important, as there is potential for a morning star reversal candlestick print. The general bullish nature since Monday's Asian session may also elicit some profit taking from bears playing the range as we trade at the lower bound of it. In this context, downside support at 1.1553 will be important over the near term. The level reflects a low from the fourth quarter of 2017, and the currency pair has not managed to close below it on a daily basis aside from one instance in late May. Overhead resistance is found at 1.1616 followed by 1.1641. The latter is considered significant due to its proximity to a rising trendline that was broken last week. The trendline is drawn by connecting the two lows printed in late June.
In the event of a break of support at 1.1553, the next area of interest falls at 1.1510, as the level held the pair higher in May and June. However, it is likely that DXY will have cleared resistance if EUR/USD were to trade at 1.1510, considering a slight divergence has been playing out as of late.