Market Data 
- EUR/USD rises to near 1.0750 as the US Dollar weakens ahead of crucial US economic data.
- The ECB is widely anticipated to start reducing interest rates in June.
- The Fed sees rate cuts this year despite little progress in disinflation in the first quarter.
EUR/USD advances to 1.0750 in Friday’s European session. The major currency pair strengthens as the US Dollar (USD) is under pressure due to weak Q1 Nonfarm productivity growth and as the Federal Reserve (Fed) delivered less hawkish guidance on interest rates than feared.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades near a three-week low of around 105.20. Still, investors should remain cautious about EUR/USD longs as the market sentiment could turn sour depending on the outcome of two key data points: the United States Nonfarm Payrolls (NFP) and the ISM Services Purchasing Managers Index (PMI) data for April, which are due in the New York session.
These US economic indicators will provide fresh cues about the state of the labor market and the health of the services sector, two key elements that the Fed takes into account when deciding on interest rates. Currently, traders have increased their bets in favor of the Federal Reserve (Fed) starting to reduce interest rates in the September meeting. These expectations were boosted after Federal Reserve Chair Jerome Powell sounded slightly less hawkish than expected in the latest monetary policy statement and the press conference.
Jerome Powell said that his forecast remained for inflation to fall over the course of the year, but that “my confidence in that is lower than it was.” He also acknowledged that inflation “is still too high,” adding that “further progress in bringing it down is not assured and the path forward is uncertain”, Reuters reported. The Fed also decided to slow down the pace of the balance sheet drawdown, which is another indication that the US central bank leaned toward policy normalization by this year.
Daily digest market movers: EUR/USD rises despite firm ECB rate cut bets for June
- EUR/USD prints a fresh four-day high at 1.0750 due to a sharp decline in the US Dollar. The strength in the major currency pair could fizzle out amid uncertainty ahead of the US NFP and firm speculation that the European Central Bank (ECB) will start reducing interest rates in June.
- The US NFP data will significantly influence market expectations for the Fed’s interest-rate outlook. The consensus shows that fresh payrolls were at 243K, lower than the former reading of 303K. The Unemployment Rate is expected to steady at 3.8%.
- Investors will also focus on the Average Hourly Earnings data, which will provide fresh clues about the inflation outlook. Monthly wage growth is forecasted to have grown steadily by 0.3%. In the same period, annual wage growth is estimated to have dipped to 4.0% from 4.1%.
- Generally, higher wage growth and strong labor demand result in robust consumer spending momentum, which eventually boosts inflationary pressures. This situation would be favorable for the US Dollar and bond yields and would likely weigh on the EUR/USD pair, as it would allow the Fed to maintain a restrictive interest rate framework for a longer period.
- Investors will also focus on the US ISM Services PMI data, a survey that gauges the performance in the services sector, which accounts for two-thirds of the economy. The Services PMI is seen improving to 52.0 from the prior reading of 51.4. Investors will also focus on subcomponents like the New Orders Index and Prices Paid Index, which will reflect the status of new business and service price inflation, respectively.
- On the Eurozone front, the European Central Bank is widely expected to reduce interest rates in June provided there isn’t any surprise with inflation as price growth in the Eurozone is on course to return to the desired rate of 2%. The expectations for the ECB achieving a “soft landing” have improved as the old continent’s economy expanded by 0.3% in the first quarter of this year, outperforming the consensus of 0.1%.
Technical Analysis: EUR/USD rises close to 1.0750
EUR/USD extends its winning spell for the third trading session on Friday and is looking to move higher to near three-week high around 1.0750. The near-term appeal of the currency pair has improved as it has broken above the 20-period Exponential Moving Average (EMA), which trades around 1.0720.
On the daily time frame, EUR/USD exhibits a sharp volatility contraction as price action has formed a Symmetrical Triangle formation. The upward-sloping border of the triangle pattern is plotted from October 3 low at 1.0448, and the downward-sloping border is placed from December 28 high around 1.1140.
The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, suggesting indecisiveness among market participants.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
