NFP could support move to 2024 highs

• EUR/USD built on Wednesday’s gains and reclaimed the area above 1.1100.
• Further slack in the US labor market weighed on the US dollar.
• US non-farm payrolls may be key to Fed’s rate cut decision.

EUR/USD regained upward momentum on Thursday, adding to the advance seen the previous day and breaching the 1.1100 mark, driven by persistent selling pressure on the US dollar (USD).

In fact, the US Dollar Index (DXY) came under further pressure, falling below the 101.00 support to print fresh five-day lows following another set of discouraging prints from the US labor market. Indeed, the US private sector added fewer jobs than originally estimated (+99,000) in August, according to the ADP report, which in turn fueled speculation about a potential rate cut by half point by the Fed at its September 18 event.

Moreover, investors are closely watching signals about the size of the Fed’s anticipated interest rate cut this month, particularly after Fed Chairman Jerome Powell suggested at the Jackson Hole Symposium that it may be time to adjust policy monetary. He noted that, unless there are unforeseen events, the labor market is unlikely to add significantly to inflationary pressures anytime soon and emphasized the Fed’s reluctance to see further cooling in labor market conditions.

Along the same lines, San Francisco Fed President Mary Daly suggested on Wednesday that the Federal Reserve (Fed) should cut interest rates to maintain a healthy labor market, but the extent of cuts will depend on future economic data. She noted that while the job market has softened, it remains healthy.

In this context, the upcoming US non-farm payrolls (NFP) report is expected to be crucial, especially given the Fed’s shift from a sole focus on controlling inflation to preventing job losses. Employment data could strongly influence the size of the Fed’s expected rate cut.

CME Group’s FedWatch tool currently indicates a roughly 61% probability of a 25bps rate cut in September, down from nearly 70% a few days earlier.

On the other hand, recent accounts from the European Central Bank (ECB) showed that policymakers saw no serious reason to cut interest rates last month. However, they noted that this decision could be revised in September due to the ongoing impact of high rates on economic growth.

Recent reports suggest growing divisions among ECB policymakers over the outlook for growth, which could influence future interest rate cut talks. Some officials are worried about a potential recession, while others are focused on lingering inflationary pressures.

However, weaker-than-expected CPI data for August in Germany and the eurozone could challenge the cautious stance of some officials, potentially paving the way for the ECB to consider another rate cut at its September 12 meeting .

In short, if the Fed opts for further or higher interest rate cuts, the policy gap between the Fed and the ECB could narrow over the medium to long term, potentially benefiting EUR/USD. This is especially possible as markets anticipate two more interest rate cuts from the ECB this year.

However, over the longer term, the US economy is expected to outperform Europe’s, which could limit any prolonged dollar weakness.

Finally, speculators (non-commercial traders) increased their net long positions in the euro (EUR) to levels not seen since January, while commercial traders (such as hedge funds) increased their net short positions to their highest on several months, driven by a significant increase in open interest.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD is likely to test its 2024 high of 1.1201 (August 26), followed by the 2023 high of 1.1275 (July 18) and the round level of 1.1300.

The pair’s next downside target is the September low of 1.1026 (September 3), ahead of the preliminary 55-day SMA at 1.917, and the weekly low of 1.0881 (August 8). From here, the key 200-day SMA lines up at 1.0855, ahead of the weekly low of 1.0777 (August 1) and the June low of 1.0666 (June 26).

Meanwhile, the pair’s uptrend is expected to continue as long as it holds above the key 200-day SMA.

The four-hour chart indicates a slow return to bullish sentiment. The initial resistance level is 1.1119, followed by 1.1139 and 1.1190. Instead, there is immediate support at 1.1026, ahead of the 200-SMA of 1.0984 and then 1.0949. The Relative Resistance Index (RSI) rose to near 62.