EUR/USD trades cautiously above 1.1000 ahead of US NFP

VaselineOctober 4, 2024

0 5 minutes read

EUR/USD trades cautiously above 1.1000 ahead of US NFP

EUR/USD trades cautiously above 1.1000 as focus shifts to US NFP.
A sharp expansion in prices paid by ISM services in the US has renewed fears that price pressures will remain persistent.
ECB Schnabel remained concerned about the growing economic risks in the euro area.

EUR/USD is trading in a tight range above the 1.1000 psychological support in the European session on Friday. The major currency pair is consolidating near 1.1030, while the US dollar (USD) is down ahead of the United States (US) Non-Farm Payrolls (NFP) report for September due at 12: 30 GMT.

The US Dollar Index (DXY), which tracks the greenback against six major currencies, is down slightly to 101.80. However, it maintains this week’s sharp recovery from the yearly low near 100.10.

Investors will pay close attention to the US NFP report as it will likely influence the pace of Federal Reserve (Fed) policy easing for the rest of the year. Economists estimate that US employers hired 140,000 new workers, down slightly from 142,000 in August. The unemployment rate is expected to remain steady at 4.2%.

Average hourly earnings are estimated to have risen at a slower 0.3% month-over-month pace from 0.4% in August, with annual numbers up 3.8%.

Looking at the CME FedWatch tool, traders appear to have already adjusted expectations of a Fed rate cut for November. Data on 30-day Federal Funds futures prices showed the probability of a further 50 basis point (bps) interest rate cut in November fell to 33% from 53% a week ago. Prospects for a big Fed rate cut for November have dimmed sharply after upbeat ADP Employment Change data for September and JOLTS Job Openings data for August.

Meanwhile, growing risks that inflation will remain persistent also forced traders to cut bets on a jumbo Fed rate cut. Thursday’s ISM Services PMI report for September showed its Price Paid component – which indicates a change in the cost of inputs – surprisingly expanded at a faster pace to 59.4. The services PMI – which gauges activities in the service sector that accounts for two-thirds of the economy – rose at a robust pace to 54.9 from estimates of 51.7 and August’s reading of 51.5.

Daily Market Reasons: EUR/USD remains on the back foot amid gloomy market mood

EUR/USD is trading sideways near 1.1030 in European trading hours after finding temporary support near 1.1000 on Thursday. The major currency pair is struggling to end its five-day losing streak. However, the pair could face more pressure as doomsday market sentiment and rising conflict in the Middle East continue to weigh on perceived risk assets such as the euro (EUR).
Conflicts between Iran and Israel deepened after the killing of Hezbollah leader Hassan Nasrallah, in retaliation for which Tehran launched hundreds of ballistic missiles at military bases in the Tel Aviv region.
Meanwhile, growing speculation that the European Central Bank (ECB) will cut interest rates again on October 17 pushed the euro back. Market expectations for an ECB interest rate cut have risen amid deepening concerns over eurozone growth and the continent’s harmonized index of consumer prices (HICP) falling below the bank’s 2% target in September.
ECB board member Isabel Schnabel, who has remained an outspoken hawk, raised concerns about growth risks in a speech on Wednesday. “We can’t ignore the headwinds to growth,” Schnabel said. She also remained confident that inflation will fall sustainably to 2% in due course with reduced labor demand and further progress in disinflation.

Technical analysis: EUR/USD is trying to gain ground near 1.1000

EUR/USD remains on the backside near the psychological support of 1.1000. The short-term outlook for the major currency pair has weakened as it is trading slightly below the 50-day exponential moving average (EMA) which is around 1.1043.

The shared currency pair continues to maintain the breakout of the Rising Channel pattern on the daily chart, which occurred in the third week of August. A new downside would appear if the pair breaks below the top line of the pattern.

The 14-day Relative Strength Index (RSI) fell to near 40.00, suggesting weakening momentum.

On the downside, a move below 1.1000 will lead to a further decline towards the 200-day EMA around 1.0900. On the other hand, the 20-day EMA at 1.1090 and the September high around 1.1200 will be major resistance areas.

Frequently asked questions about the euro

Euro is the currency for the 19 countries of the European Union that belong to the Eurozone. It is the second most heavily traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, representing an estimated 30% discount on all trades, 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 euro area. The ECB sets interest rates and manages monetary policy. The main mandate of the ECB is to maintain price stability, which means either controlling inflation or stimulating growth. Its main tool is raising or lowering interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of the national banks of the euro area and six permanent members, including the president of the ECB, Christine Lagarde.

Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric element for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its peers will typically benefit the euro as it makes the region more attractive as a place for global investors to park their money.

Data releases measure the health of the economy and can have an impact on the euro. Indicators such as GDP, manufacturing and services PMI, 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, it may encourage the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if the 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 particularly significant as they account for 75% of the euro area economy.

Another important piece of information 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 in a given period. If a country produces highly sought-after exports, then its currency will only gain in value from the additional demand created by foreign buyers wanting to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

VaselineOctober 4, 2024

0 5 minutes read

Daily Market Reasons: EUR/USD remains on the back foot amid gloomy market mood

Technical analysis: EUR/USD is trying to gain ground near 1.1000

Frequently asked questions about the euro

Vaseline

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