EUR/USD struggles for direction as investors sideline ahead of US NFP

June 7, 2024 11:24 am

  • EUR/USD trades back and forth near 1.0900 ahead of US NFP data for May.
  • The US NFP will indicate whether labor market conditions have started normalizing.
  • The ECB commenced its policy easing campaign but refrained from committing to a predefined interest-rate path.

EUR/USD trades sideways near 1.0900 in Friday’s European session. The major currency pair remains broadly steady as traders stay on the sidelines ahead of the United States Nonfarm Payrolls (NFP) data for May, which will be published at 12:30 GMT.

According to the estimates, US employers added  185K payrolls, lower than the 175K increase seen in April. The Unemployment Rate is estimated to have remained stable at 3.9%. Higher-than-expected payroll numbers would likely clear doubts about easing labor demand after recent employment-oriented indicators have suggested that the jobs market is loosening.

The JOLTS Job Openings data for April and ADP Employment Change for May came in weaker than expected. Also, Initial Jobless Claims for the week ending May 31 were higher than estimates, suggesting that some heat has been released from the labor market.

Investors will also pay close attention to the Average Hourly Earnings, which measures wage inflation. On a month-on-month basis, the reading is expected to have ticked up by 0.3% from 0.2%. The annual reading is estimated to have risen steadily by 3.9%.

Daily digest market movers: EUR/USD consolidates as investors seek fresh guidance on ECB’s interest rates

  • EUR/USD remains subdued around 1.0900 amid uncertainty ahead of the US Employment data and amid doubts over the European Central Bank’s (ECB) interest-rate path. The bank opted on Thursday to cut interest rates by 25 basis points (bps) as expected.
  • The ECB reduced its key borrowing rates for the first time since 2019 as officials were confident over progress in inflation declining towards the desired rate of 2%. However, ECB President Christine Lagarde refused to commit to any specific interest-rate path, saying that the battle against inflation is far from over and price pressures are expected to stay around current levels this year. The ECB will remain data-dependent, she said.
  • The latest inflation projections by the ECB staff indicate that the Eurozone’s annual core inflation will average 2.8% in 2024, 2.2% in 2025, and 2.0% in 2026, slightly up from the previous forecasts. 
  • The ECB was expected to remain data-dependent, as the recent Eurozone’s Harmonized Index of Consumer Prices (HICP) report showed that annual headline and core inflation grew more than expected, while economic growth in Q1 was also stronger at 0.3%. This showed that the technical recession in the second half of 2023 was shallow.
  • The US NFP data will provide cues about whether the Fed will start reducing interest rates in September. The Fed is managing policy to ensure that inflation returns sustainably to 2% while maintaining full employment. Recently, weak employment-related economic indicators boosted expectations for the Fed to cut rates in September.
  • The CME FedWatch tool shows that traders see a 68% chance of rate cuts in September, significantly up from the 54.5% recorded a week ago.

Technical Analysis: EUR/USD trades sideways near 1.0900

EUR/USD stays quiet near 1.0900 ahead of the US NFP data,  trading inside Thursday’s range. The major currency pair trades near the neckline of the Inverted Head and Shoulder (H&S) pattern, which is marked from April 9 high at 1.0885. A breakout of this pattern could result in a bullish reversal.

The near-term outlook remains firm due to a golden cross formation, a bullish crossover of the 50-day and 200-day Exponential Moving Averages (EMAs) near 1.0800.

The 14-period Relative Strength Index (RSI) recovers to 60.00. A decisive move above the same would push the momentum towards the upside.

Looking up, the major currency pair is expected to extend gains towards the March 21 high at around 1.0950 and the psychological resistance of 1.1000 if it decisively breaks above the round-level resistance of 1.0900. However, a downside move below the 200-day EMA at 1.0800 could push it into a bearish trajectory.


Euro FAQs

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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