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Will economic data later in week free EUR/USD from range bound behavior?

FXstreet.com (Barcelona) - The EUR/USD finished the day sharply higher, at one point trading all the way up to 1.3107 beforre leaking lower in the day to close up 76 pips at 1.3070. Some analysts were pointing towards weaker than expected ISM data out of US as the main catalyst for the bullish move in the pair. Economic data out of the US will slow down a bit the next few days, but volatility is certain to pick up as we approach the ECB Rate Decision on Thursday, as well as the Non-Farm Payrolls number due out of the US on Friday.

According to Seam Callow at Westpac, “the US dollar was smacked across the board as the surprisingly weak ISM manufacturing survey and construction spending suggested the Fed would not alter policy any time soon. Dollar Index fell -0.9%. Its main component EUR had been very close to its session London low of 1.2956 when the data hit the screens, sparking a bounce to 1.3035. A subsequent wave of USD selling produced a NY high of 1.3108, its strongest point since 9 May.”

Callow went on to comment, “checking the data details, the US ISM manufacturing index surprised to the downside, falling back below 50 for the first time since last November. The headline slipped to 49 in May from 50.7 versus market expectations of a modest rise to 51.0. The detail was soft too with weakness in both new orders (48.8 from 52.3) and production (48.6 from 53.5) although the employment sub-index was relatively stable at 50.1 from 50.2.”

Other analysts were pointing out the uptick in the European PMI’s, which came in slightly higher than estimates (although still below 50). Furthermore, as we approach the ECB Rate Decision later in the week, it's important to take note of recent comments form ECB President Mario Draghi.

According to Kathy Lien at BK Asset Management, “perhaps the tides are shifting with European data improving and U.S. data deteriorating. As we have seen in this morning's Eurozone manufacturing PMI numbers, the outlook for Europe is brightening. The manufacturing sector did not contract as much as initially reported in the month of May. The index was revised up from 48.8 to 48.3 a 14 month high with improvements seen in both Germany and France."

She went on to add, “on Sunday, we heard some cautiously optimistic comments from ECB President Draghi that were later confirmed by the PMI reports. He said, there are "few signs of possible stabilization" in the Eurozone and they expect a "very gradual recovery" later this year. With the central bank gearing up to meet this week, these comments could be Draghi's way of setting expectations for more a moderate and less pessimistic outlook on Thursday.”

From a technical perspective, the daily chart still remains primarily range bound between 1.3250 and 1.2800. Short term moving averages and RSI (14) remain in neutral territory as neither side can provide substantial follow through to sustain a more defined trend. It should be noted the RSI (14) is once again approaching the critical resistance level near 60 on the daily chart, which the pair has not been able to take out on a close since dropping below in early February. Initial resistance sits at 1.3108 (the 100dma), followed by 1.3160 (supply candle on weekly chart). First support sits at 1.3037 (the 200dma), followed by 1.2973 (the 9 dma). Until either side can take out the upper or lower end of the trading range mentioned above, expected conditions to remain choppy.

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