EUR/USD rallies as weak US NFP boosts Fed rate-cut prospects

  • EUR/USD rises to near 1.0800 as the US Dollar weakens after poor NFP data.
  • The ECB is widely anticipated to start reducing interest rates in June.
  • The Fed sees rate cuts this year despite little progress in disinflation in the first quarter.

EUR/USD soars to 1.0800 as the US Dollar weakens in Friday’s early American session. The US Dollar faces an intense sell-off as the United States Bureau of Labor Statistics (BLS) has reported that labor demand remains weak and wage growth slowed in April. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, has printed a fresh three-week low near 104.50.

The market sentiment has improved significantly as the weak Nonfarm Payrolls (NFP) report will strengthen speculation for the Federal Reserve (Fed), reducing interest rates from the September meeting. Generally, slower wage growth and weak labor demand result in poor consumer spending momentum, which indicates that inflationary pressures could ease. This situation would be unfavorable for the US Dollar and bond yields and would likely strengthen the EUR/USD pair, as it would allow the Fed to rollback its restrictive interest rate framework.

The US Dollar was already on the back foot due to weak Q1 Nonfarm productivity growth, and less hawkish guidance on interest rates than feared by the Fed in its monetary policy statement on Wednesday.

Meanwhile, the ISM Services Purchasing Managers Index (PMI) data for April have also missed expectations. Services PMI data, a survey that gauges the performance in the services sector, which accounts for two-thirds of the economy, falls sharply below the 50.0 threshold to 49.4. Investors anticipated to have increased to 52.0 from the prior reading of 51.4. New Business inflows fall sharply to 52.2 from the former release of 54.4. However, Prices Paid rises strongly to 59.2, which reflects stubborn price pressures. The US economic indicator provides fresh cues about the state of the labour market and the health of the services sector, two key elements that the Fed takes into account when deciding on interest rates.

Daily digest market movers: EUR/USD rises as US Dollar weakens

  • EUR/USD rallies to a three-week high near 1.0800. The strength in the major currency pair is backed by a weaker-than-expected US NFP report. The NFP report has shown that fresh payrolls were at 175K, significantly lower than the consensus of 243K and the former reading of 315K, upwardly revised from 303K. The Unemployment Rate rose to 3.9%, against the consensus and the prior reading of 3.8%. 
  • The Average Hourly Earnings data, which will provide fresh clues about the inflation outlook, softened in April. Monthly wage growth grew at a slower pace of 0.2% from the estimates and the prior reading of 0.3%. In the same period, annual wage growth dipped to 3.9%, against the consensus of 4.0% and March's reading of 4.1%.
  • This will boost expectations for the Fed, reducing rates early. Recently, traders increased their bets in favor of the Fed starting to reduce interest rates in the September meeting. These bets were boosted after Fed Chair Jerome Powell sounded slightly less hawkish than expected in the latest monetary policy statement and the press conference.
  • Jerome Powell said that his forecast remained for inflation to fall over the course of the year, but that "my confidence in that is lower than it was." He also acknowledged that inflation “is still too high," adding that "further progress in bringing it down is not assured and the path forward is uncertain", Reuters reported. The Fed also decided to slow down the pace of the balance sheet drawdown, which is another indication that the US central bank leaned toward policy normalization by this year.
  • On the Eurozone front, the European Central Bank is widely expected to reduce interest rates in June provided there isn’t any surprise with inflation as price growth in the Eurozone is on course to return to the desired rate of 2%. The expectations for the ECB achieving a “soft landing” have improved as the old continent’s economy expanded by 0.3% in the first quarter of this year, outperforming the consensus of 0.1%.

Technical Analysis: EUR/USD tests the 1.0800 resistance

EUR/USD extends its winning spell for the third trading session on Friday and has kissed three-week high around 1.0800. The near-term appeal of the currency pair has improved as it has broken above the 20-period Exponential Moving Average (EMA), which trades around 1.0720.

On the daily time frame, EUR/USD exhibits a sharp volatility contraction as price action has formed a Symmetrical Triangle formation. The upward-sloping border of the triangle pattern is plotted from October 3 low at 1.0448, and the downward-sloping border is placed from December 28 high around 1.1140.

The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, suggesting indecisiveness among market participants.

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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