EUR/USD’s bullish momentum interrupted by strong US jobs report, set to end week above 1.1450 for 2.8% weekly gain

Strong US labour market data on Friday took some of the wind out of EUR/USD’s sails and, though not enough to trigger a lasting reversal back towards 1.1400, has at least prevented the pair from breaching January’s highs in the 1.1480s. Indeed, though the pair has recovered back from its sub-1.1420 post-NFP data session lows, it has been unable to recoup back to pre-data levels above 1.1460.

In the context of a sharp spike higher in yields across the US curve as bond markets price in a higher likelihood of more aggressive Fed tightening and a higher terminal rate, a slowdown in EUR/USD’s rally on Friday makes sense. At current levels in the 1.1450s, the pair still trades higher by about 0.2% on the day. On the week, the pair looks set to gain about 2.8%, its best performance since March 2020.

Some might find the eagerness with which EUR/USD bulls bought the post-NFP data dip back towards the 1.1400 level surprising. Others might argue that it demonstrates the strength of the shift in the market's view on the euro in wake of Thursday’s hawkish ECB meeting. Recall that ECB President Christine Lagarde on Thursday acknowledged rising Eurozone inflation risks and refused to repeat a prior statement that rate hikes in 2022 were unlikely. Market participants took this to mean that, for the first time, the ECB was admitting that hikes this year are a possibility, a “pivotal” shift according to some.

Eurozone money markets jumped to price in as much as 50bps worth of rate hikes by the end of December (from closer to 20bps before). Whilst this might be a stretch, the fact that the ECB is clearly tilted towards rate hikes in 2022 (the first time in a decade) is quite something. Whilst the shift in stance from the ECB might not be enough to result in a lasting EUR/USD rally, say, beyond resistance between current levels and the 1.1500 mark, it makes a return back below 1.1200 less likely. After all, the divergence between Fed and ECB policy is now likely to be not nearly as much as some had previously thought.