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Euro retargets 1.0900 as markets digest NFP, looks at US ISM

  • The Euro's rebound gathers extra pace gainst the US Dollar.
  • Stocks in Europe en route to a mixed closing on Friday.
  • The USD Index (DXY) remains on the defensive near 103.40.
  • No surprises from the final Manufacturing PMIs in Germany, Eurozone.
  • US Nonfarm Payrolls surprised to the upside at 187K jobs in August.
  • The US Unrmployment Rate rose to 3.8%.

The Euro's (EUR) upside momentum manages to gather extra impulse against the US Dollar (USD) as market participants continue to adjust to the release of US NFP for the month of August, encouraging EUR/USD to shift its focus to the 1.0900 hurdle at the end of the week.

The now marked advance in the pair comes in line with the renewed offered stance in the Greenback. The USD Index (DXY), which tracks the US Dollar against a basket of six other major currencies, accelerates its decline after the US economy added 187K jobs in August, more than initially estimated. However, the Unemployment Rate unexpectedly ticked higher to 3.8% (from 3.5%) and the Average Hourly Earnings – a proxy for wage inflation – expanded 4.3% from a year earlier, also coming in short of consensus.

Meanwhile, the recent August Payrolls report appears to have strengthened the indications of a slowdown in the US labor market. This, in turn, has encouraged investors to further adjust their expectations, leaning towards the possibility of the Federal Reserve putting a halt to its tightening measures.

Back to the European Central Bank (ECB), there is a great deal of uncertainty regarding the potential steps beyond the summer amidst a pretty divided Governing Council and rising speculation that a stagflation scenario could be brewing in the region.

Data-wise, final Manufacturing PMIs in Germany and the broader euro area came in at 39.1 and 43.5, respectively, for the month of August. The readings, which signal a persisting contraction in factory activity, were broadly in line with the preliminary estimates.

Later in the American session, the ISM Manufacturing PMI will be in the limelight seconded by Construction Spending and the final S&P Global Manufacturing PMI.

Daily digest market movers: Euro appears firmer ahead of ISM

  • The Euro picks up extra pace against the USD.
  • Final PMIs in Europe broadly matched the preliminary prints.
  • China’s Caixin Manufacturing PMI returned to expansionary territory.
  • The PBoC reduced the FX RRR to 4% to support the Chinese yuan.
  • Investors’ focus now shifts to the ISM Manufacturing PMI.
  • The US economy added 187K jobs in August, according to NFP figures.
  • Investors see the Fed on hold for the remainder of the year.

Technical Analysis: Euro should accelerate its upside above 1.0950

EUR/USD regains some upside traction following Thursday’s strong pullback and three-day lows near 1.0830.  

In case bulls regain the upper hand and EUR/USD surpasses Wednesday's weekly top of 1.0945, the pair is expected to meet the provisional 55-day Simple Moving Average (SMA) at 1.0965 prior to the psychological 1.1000 barrier and the August 10 monthly top at 1.1064. Once the latter is cleared, spot could challenge July's 27 peak at 1.1149. If the pair surpasses this region, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 seen on July 18. Further up comes the 2022 high at 1.1495, which is closely followed by the round level of 1.1500.

The resumption of the downward bias could motivate the pair to initially test the key 200-day SMA at 1.0815 ahead of the August 25 low of 1.0765. The breach of the latter exposes the May 31 low of 1.0635 prior to the March 15 low of 1.0516 and the 2023 low at 1.0481 recorded on January 6.

Sustained losses are likely in EUR/USD once the 200-day SMA is breached in a convincing fashion.

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.

Author

Pablo Piovano

Born and bred in Argentina, Pablo has been carrying on with his passion for FX markets and trading since his first college years.

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