• On Friday, the US employment report for August disappointed in all fronts. NFP rose a mere 156k, missing estimates of 180k, while prints for June and July were revised down. The unemployment rate ticked up and average hourly earnings slowed by more than expected in monthly terms.

• EUR/USD spiked higher as soon as the report was out, breaking above the resistance hurdle of 1.1920 (R1). Nevertheless, the rate was stopped around 20 pips below the psychological barrier of 1.2000 (R2) and a few minutes later it tumbled to give back all its NFP-related gains. The tumble came after Bloomberg reports, citing sources familiar with ECB discussion, noted that the Bank is highly unlikely to take any decision at Thursday’s meeting, add added that policymakers may not be ready to finalize their decision on QE until December. The pair continued to trade lower in the aftermath of these reports but hit support slightly above the key line of 1.1830 (S1) and then, it rebounded somewhat.

• In our view, given that the rate remains above the important barrier of 1.1830 (S1) and also above the uptrend line taken from the low of the 17th of April, the medium-term path remains positive. A break back above 1.1920 (R1) may confirm that the slide towards 1.1830 (S1) was just a corrective wave, and may open the way for the round figure of 1.2000 (R1).

• Focus for EUR/USD traders now turns to the ECB policy meeting on Thursday. Following Reuters and Bloomberg reports last week, we believe that in case the Bank maintains its QE easing bias, any declines in the rate are likely to be modest, as the pair has already responded to the aforementioned reports. The surprise would be a removal of the bias. Something like that could cause EUR/USD to surge.

Risk-off prevails following North Korea’s nuclear test

• Today, Asian stocks opened with negative gaps, while safe havens, like the yen and gold, gapped up as North Korea reported on Sunday that it has successfully tested a nuclear weapon. Specifically, a hydrogen bomb, a device many times more powerful than an atomic bomb. This negative sentiment may roll over into the European and US equity markets.

• The incident drew international condemnation, while US President Trump responded by saying that the US is considering, in addition to other options, stopping all trade with any country doing business with North Korea. Also, when asked, the President refused to rule out military action. What’s more, South Korea has conducted a missile drill in response to North Korea’s action, according to media reports. The UN Security Council is set to meet today in order to discuss fresh sanctions against the isolated nation.

• The situation seems to be escalating, but the magnitude of the market response suggests that investors are not anticipating a prolonged turmoil yet. We believe that the reaction would be much larger if this was the case. Actually, the yen pared some gains following today’s opening. Having said that though, future developments that heighten concerns over a military conflict are likely lead to more risk-off market activity.

• Gold opened with a positive gap today following North Korea’s nuclear test over the weekend. The gap brought the price above the resistance (now turned into support) territory of 1325 (S1), a move that confirms a forthcoming higher high on the 4-hour chart and thereby, keeps the short-term outlook positive. Even if we experience a minor pullback given that the latest rally appears overextended, we expect the bulls to remain in charge and aim for a test near 1340 (R1). A decisive break above that level is possible to pave the way towards our next resistance of 1352 (R2), marked by the peaks of the 6th and 7th of September 2016.

As for today’s events:

• The only noteworthy indicator we get is the UK construction PMI for August. Markets will remain closed in US and Canada in celebration of the Labor Day.

As for the rest of the week:

• On Tuesday, the RBA will announce its policy decision. We don’t expect any action at this meeting, neither a hawkish shift in language. We will dig into the statement for clues with regards to how much officials are concerned with the current levels Aussie is trading. On Wednesday, the central bank torch will be passed to the BoC. Although another rate hike this year is more-than-fully priced in, we don’t expect it to come this week. We expect however officials to maintain their hawkish bias. On Thursday, as we already noted we have the all-important ECB meeting. A few hours ahead of the ECB, the Riksbank publishes its own interest rate decision. Finally on Friday, we get China’s trade data for August and Canada’s employment report for the same month.

EUR/USD

• Support: 1.1830 (S1), 1.1730 (S2), 1.1660 (S3)

• Resistance: 1.1920 (R1), 1.2000 (R2), 1.2100 (R3)

Gold

• Support: 1325 (S1),1313 (S2), 1300 (S3)

• Resistance: 1340 (R1), 1352 (R2), 1365 (R3)