• United States inflation and growth-related figures spurred speculation the Fed will remain on hold for longer.
  • European policymakers continue to pave the way towards a June rate cut.
  • EUR/USD battles to regain the upside in a risk-averse environment.

The EUR/USD pair temporarily reconquered the 1.0700 threshold this week, settling at around that round level. The US Dollar lost its appeal following discouraging United States (US) macroeconomic data indicating tepid growth and persistent inflationary pressures. The data became more relevant ahead of the Federal Reserve (Fed) monetary policy decision next week, exacerbated by the blackout period that prevents Fed officials from making comments on the matter ten days before the event.

Gearing up for a hawkish Fed

The US Fed will announce its monetary policy decision on May 1st, and market participants believe Chair Jerome Powell & co will maintain the hawkish bias,  downplaying rate-cut speculation. Additionally, the Federal Open Market Committee (FOMC) will likely maintain the current federal funds interest rate target range of 5.25% to 5.5% unchanged, as recent data suggest inflation has been stickier than anticipated. Not really fresh news. What’s different from last time is that policymakers were optimistic about dodging a recession. That won’t be the case this time.

Throughout the week, the different US figures painted a worrisome picture. S&P Global released the preliminary estimates of the April Purchasing Managers Indexes (PMIs), which showed a sharp contraction in the US manufacturing sector, with the index falling to 49.9, back into contraction territory. At the same time, services output also declined, with the Services PMI printing at 50.9 from 51.7 in March.

Durable Goods Orders were up 2.6% in March, improving from a downwardly revised 0.7% in the previous month. However, the preliminary estimate of the Q1 Gross Domestic Product (GDP) showed a modest 1.6% annualized increase in the three months to March, well below the 2.5% anticipated and the previous 3.4%. Furthermore, the quarterly Personal Expenditures (PCE) Price Index, released alongside GDP rose 3.4% in Q1, much higher than the previous 1.8%. On Friday, the US published the March PCE Price Index, which rose to 2.7% YoY in March from 2.5% in February, above the market expectation of 2.6%. The core PCE Price Index, the Fed’s favorite inflation measure,  was up 2.8% YoY, higher than the expected 2.6%.

Bottom line, Fed officials head into the monetary policy meeting knowing there’s no room for rate cuts with current data.

Interestingly, the US Dollar saw a short-lived advance amid risk aversion, but speculative interest ended up dropping the Greenback instead of high-yielding assets.

Improvements in Europe

The Euro, in the meantime, saw modest support from mixed local data. The Hamburg Commercial Bank (HCOB) and S&P Global PMIs showed that, while manufacturing output remains within contraction territory, the services sector continued to improve. The EU Composite PMI surged to 51.4 in April, according to preliminary estimates.  Additionally, the German IFO Survey showed Business Climate improved in April by more than anticiptated, hitting 89.4 after printing 87.9 in March. The Current Assessment and Expectations sub-component also surpassed expectations while improving from previous readings.

Meanwhile, European Central Bank (ECB) officials kept paving the way for a rate cut in June. Bank of France and ECB policymaker François Villeroy de Galhau said they should cut rates in June because policymakers are “now confident enough and increasingly confident about the disinflationary path in the euro area.” Furthermore, the Italian central bank’s head, Fabio Panetta, noted that if the Fed keeps rates on hold for longer than what markets expect, it would likely reinforce the case for an ECB rate cut rather than weakening it.

Finally, ECB President Christine Lagarde maintained its cautious approach, saying that policymakers “need to build a bit more confidence in the disinflationary process,” adding moderating the restrictive monetary policy is nearby.

What’s next in the docket

Beyond the Fed’s monetary policy decision, the macroeconomic calendar for the upcoming week will include several US employment-related figures, including the US Nonfarm Payrolls (NFP) report on Friday. Furthermore, the country will publish the April ISM Manufacturing PMI and the ISM Services PMI for the same month.

Across the pond, Germany will publish March Retail Sales and the preliminary estimate of the Q1 GDP, while the Eurozone will also unveil the first estimates of the Q1 GDP. The EU will also publish the preliminary estimates of the April Harmonized Index of Consumer Prices (HICP).

EUR/USD technical outlook

From a technical point of view, EUR/USD lacks bullish strength but seems to have found a temporal bottom in the weekly chart. The pair bounced from a flat 100 Simple Moving Average (SMA) and posted a higher low and a higher high. At the same time, the pair develops below also flat 20 and 200 SMAs, limiting its bullish potential. Furthermore, technical indicators picked up modestly, but remain below their midlines, way short of supporting an upward extension.

The daily chart shows EUR/USD briefly surpassed a bearish 20 SMA but quickly retreated below it. The 100 and 200 SMAs, in the meantime, maintain their downward slopes far above the shorter one, all of which skews the risk to the downside. Finally, technical indicators resumed their slide within negative levels, and while their strength is limited, they also suggest an upcoming slide.

Bulls may be more comfortable if the pair surpasses the weekly high at 1.0752. Gains beyond the level could lead to a test of the 1.0820 price zone en route to 1.0940. A weekly close above the latter will deny the bearish case in the mid-term. Near-term support comes at 1.0680, followed by the year’s low at 1.0600. A break below the latter could trigger a slide towards the 1.0520 price zone, followed then by the 1.0440 level.

 

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Economic Indicator

Nonfarm Payrolls

The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews ​and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.

Read more.

Next release: Fri May 03, 2024 12:30

Frequency: Monthly

Consensus: 210K

Previous: 303K

Source: US Bureau of Labor Statistics

America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.

 

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