- EUR/USD has been trading in a narrow range between 1.0790 and 1.0738 since the start of this week's trading.
- Amid the performance of the currency pair in Forex currency trading companies, EUR/USD may take cues from tomorrow's US initial jobless claims report and the University of Michigan's preliminary US consumer sentiment index on Friday.
- Further signs of weakness in the Labor market could mean a fresh decline for the dollar, especially as the latest nonfarm payrolls report missed estimates.
On the other hand, another positive surprise in the weekly jobless claims report could spur gains for the US currency today. Note that European markets are closed for Labor Day, so liquidity is thinner than usual. According to economic calendar data, the University of Michigan's consumer sentiment index is expected to show another decline in confidence, as Americans may still be struggling with high-cost pressures and the possibility of higher interest rates for longer. However, an improvement in consumer sentiment could translate into stronger spending activity in the future, perhaps supporting the dollar.
What is the expected EUR/USD in the coming period?
In this regard, CIBC's currency analysis department expects EUR/USD to weaken to 1.05 support before recovering to 1.07 by the end of 2024. On the other hand, MUFG expects EUR/USD net gains to reach 1.12 after any initial weakness.
EUR/USD had found support near 1.0650 this week and rose to 1.0770 after the weaker-than-expected US data. The Fed kept US interest rates at 5.50% after the last FOMC meeting, in line with consensus expectations. Also, Fed Chair Jerome Powell noted that the evidence needed to be confident that inflation is on a sustained downward path to the target has not been met in recent months, and therefore there will be a delay in cutting interest rates.
However, Powell considers another increase in interest rates unlikely.
In terms of economic data, US nonfarm payrolls rose by 175,000 for April compared to consensus expectations of around 240,000, while there was a small upward revision to March data to 315,000 from the previously reported 303,000. Also, the country's unemployment rate rose to 3.9% from 3.8%. Similarly, Average hourly earnings rose 0.2% monthly, slightly below expectations of 0.3%, with growth slowing on an annual basis to 3.9% from 4.1%.
After this data, financial markets priced in two rate cuts for 2024 compared to one previously, with an almost 40% chance of a rate cut in July. Prior to that, the latest ISM business confidence surveys for the manufacturing and services sectors showed a contraction for April and below consensus expectations, raising fresh doubts about the US economy.
MUFG Bank commented; “There needs to be, of course, a shift in the economy's momentum for the Fed to implement the amount of interest rate cuts we expect. Clearly, because the shift did not occur as quickly as originally expected is not necessarily a reason to abandon this view. According to CIBC, US households entered the rate hike cycle with their balance sheets in much better shape than households in other countries and relative to the pre-2008 days.
Meanwhile, the report pointed to the significant reduction in financial leverage after the 2008 financial crisis and the high proportion of fixed-rate mortgages, which will limit the impact of rising interest rates. In this context, he believes there is a risk that interest rates will remain higher than previously expected and that the neutral rate could reach 4.0%. For its part, HSBC Bank commented: “Relative interest rates should provide some support to the US dollar if other global central banks, most notably in Europe, show more dovish momentum in the weeks and months ahead. This remains our central issue.”
Generally, financial markets remain very confident that the ECB will cut interest rates in June, but recovery hopes have dampened expectations for more aggressive action during the second half of the year. Nonetheless, MUFG Bank appears to be more positive about the eurozone's outlook. Stated, “There is now compelling evidence of better growth conditions in the future, which will provide support to the euro at lower levels.”
EUR/USD Technical analysis and forecast:
It seems that the euro to US dollar exchange rate (EUR/USD) has reached its peak at the short-term downtrend line around the 1.0800 level, which may prompt a return to selling activity. Technical indicators reflect bearish pressure, which could push the EUR/USD price back to the swing low at 1.0605 or lower. Currently, the 100 Simple Moving Average (SMA) is below the 200 SMA, signalling that the downtrend is likely to gain momentum rather than reverse, but the gap between the indicators is narrowing, indicating a slowdown in selling pressure.
A breakthrough above the trend line and the area of interest may be sufficient to signal that the reversal from the downtrend is underway. Consequently, this could lead to a rise in the EUR/USD price to higher levels near 1.0900 and beyond. At the same time, the Stochastic oscillator is moving downward, suggesting that the price may continue to follow the same direction until the oscillator reaches the oversold region and turns upward. Ultimately, the Relative Strength Index (RSI) having more room to move downwards, the EUR/USD price may face further selling momentum from here.
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