EUR/USD rebound approaches 1.0000 as ECB/Fed hawks jostle ahead of NFP

• EUR/USD pares the biggest daily fall in seven weeks amid pre-NFP consolidation.
• Yields keep DXY on bull’s radar despite latest pullback from two-decade high.
• Hawkish money market bets on ECB rate hike, hopes of overcoming the bloc’s energy crisis to limit downside.
• US NFP signals softer readings for August, suggesting USD run-up on positive surprise.

EUR/USD licks its wounds around 0.9960-65, after posting the biggest daily fall in nearly two months, as traders await the all-important US Nonfarm Payrolls (NFP) during early Friday morning in Europe. In addition to the market’s preparations for the US jobs report for August, recently hawkish concerns over the European Central Bank (ECB) also underpins the corrective pullback.

“The European Central Bank remains behind the curve on tackling record euro-zone inflation and will have to act more forcefully than previously envisaged to wrest control of prices,” according to a survey of economists conducted by Bloomberg. On Thursday, Reuters mentioned that Eurozone money markets now price in a roughly 80% chance of a 75 basis-point ECB rate hike next week, versus just over 50% on Wednesday.

Even so, the final readings of the Eurozone PMI and comments from the ECB policymaker Mario Centeno appeared to have probed the EUR/USD buyers. The final August manufacturing PMI edged 0.1 lower to 49.6 vs 49.7. This is the second month below 50, highlighting the recession risks facing the sector. Further, European Central Bank (ECB) Governing Council member Mario Centeno said on Thursday, per Reuters, “Decision-makers should not rush to take pro-cyclical measures as inflation is expected to slowly diminish in the longer run.”

It should be noted that the recent efforts by the old continent to overcome the energy crisis seemed to have gained acceptance from the Middle East and hence the bloc leaders sound optimistic to win over Russia-linked gas and oil shortages, with the help of Iran, Iraq and Saudi Arabia.

On the other hand, US ISM Manufacturing PMI reprinted the 52.8 figure for August versus the market expectations of 52.0. Further, the final reading of S&P Manufacturing PMI for August rose past 51.3 initial estimates to 51.5, versus 52.2 prior final for July. On the same line, US Initial Jobless Claims dropped to 232K versus 248K forecast and 237K prior. Further, the Unit Labor Cost rose 10.2% QoQ during the second quarter (Q2) versus 10.7% expected while Labor Productivity dropped by 4.1% during Q2 versus the anticipated fall of 4.5% and -4.6% prior.

Following the data, Atlanta Fed President Raphael Bostic said that the Fed has work to do with inflation, a 'long way' from 2%. Before that, the newly appointed Dallas Fed President Lory Logan joined the lines of hawkish fellow US central bankers while saying, “Restoring price stability is No. 1 priority.”

It should be noted that the pessimism surrounding China and increasingly hawkish Fed bets join the aforementioned US data and Fedspeak to underpin the US Dollar Index (DXY) strength as it seesaws near a 20-year high, marked the previous day. That said, the CME’s FedWatch Tool signals 74% chance of the Fed’s 75 basis points of a rate hike in September versus nearly 69% previously.

Looking forward, the US Nonfarm Payrolls (NFP) and Unemployment Rate for August, expected 300K and 3.5% versus 528K and 3.5% respective priors, will be important for fresh directions amid recent counter-trend sentiment. Ahead of the data, the Financial Times (FT) said, “The pace of US jobs growth is poised to have slowed in August after an unexpected acceleration the previous month, though it is likely to remain high enough to compel the Federal Reserve to plow ahead with its aggressive tightening of monetary policy.”

Technical analysis

EUR/USD remains on the bear’s radar unless crossing 1.0180 hurdle comprising the 50-DMA and upper line of a four-month-old bearish channel.