EUR/USD trades cautiously due to upbeat US Dollar, ECB dovish bets

07 Oct 2024, 09:23 by Sagar Dua · FXStreet

EUR/USD remains on the backfoot near 1.0950 as the Fed is expected to follow a gradual rate-cut approach.
US labor demand remained robust and wage growth increased in September.
ECB’s Villeroy supported another interest rate cut on October 17.

EUR/USD struggles to gain ground near the key support of 1.0950 in Monday’s North American session. The major currency pair remains on the backfoot as the US Dollar (USD) clings to gains near a fresh seven-week high, prompted by surprisingly upbeat Friday’s United States (US) labor market data for September. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, trades close to 102.50.

The US employment report showed a resilient labor demand and strong wage growth. As per the report, the economy added 254K non-farm jobs, which was significantly higher than the estimates of 140K and the former release of 159K, upwardly revised from 142K. The Unemployment Rate decelerated to 4.1% from expectations and the August print of 4.2%.

Upbeat employment data forced traders to push back market expectations for the Federal Reserve (Fed) to reduce interest rates by 50 basis points (bps) again in November. The Fed started its policy-easing cycle with a larger-than-usual interest rate cut by 50 bps in September.

Meanwhile, renewed fears of inflation remaining persistent after the release of the hotter-than-expected Average Hourly Earnings for September also expunged Fed large rate cut bets. Average Hourly Earnings, a key measure of wage growth, accelerated at a faster-than-expected pace to 4.0% year-over-year. Month-on-month wage growth measure rose by 0.4%.

For more clarity on the interest rate outlook, investors will focus on the US Consumer Price Index (CPI) data for September, which will be published on Thursday.

Daily digest market movers: EUR/USD struggles for firm-footing amid firm US Dollar

EUR/USD remains vulnerable near 1.0950 in North American trading hours. Apart from the upbeat US Dollar, uncertainty over the Euro’s (EUR) outlook has also kept the pair on the backseat. The Euro’s outlook has become uncertain amid increasing speculation that the European Central Bank (ECB) could cut interest rates again in its monetary policy meeting on October 17.
Large dovish ECB bets for October have been prompted by growing risks that inflation in the Eurozone could stabilize below the bank’s target of 2%. Annual Eurozone Harmonized Index of Consumer Prices (HICP) decelerated at a faster-than-expected pace to 1.8% in September, according to flash estimates.
The economic outlook of Germany, the Eurozone’s largest economy, is weak due to soft demand. The German economy is forecasted to have shrunk by 0.2% annually for the current year by the ministry, led by Robert Habeck of the Green party, newspaper Sueddeutsche Zeitung reported on Sunday.
Meanwhile, ECB policymaker and French Central Bank Chief François Villeroy de Galhau also emphasized the need to cut interest rates again this month, told to La Repubblica over the weekend. Villeroy said, "In the last two years our main risk was to overshoot our 2% target." "Now we must also pay attention to the opposite risk, of undershooting our objective due to weak growth and a restrictive monetary policy for too long," he added.
On the economic data front, Eurozone Retail Sales expanded but missed expectations in August. Annually, Retail Sales rose by 0.8% after contracting by 0.1% in July. Economists expected Retail Sales to have grown by 1%. Month-on-month Retail Sales rose expectedly by 0.2%.

Technical Analysis: EUR/USD remains below 20-day EMA

EUR/USD strives for a firm footing near the immediate support of 1.0950. The major currency pair is broadly under pressure as it has delivered a breakdown of the Double Top chart pattern formation on a daily timeframe. The above-mentioned chart pattern was triggered after the shared currency pair broke below the September 11 low of 1.1000.

The 14-day Relative Strength Index (RSI) slides below 40.00. A bearish momentum would trigger if the RSI sustains below the same.

Looking down, the pair is expected to find support near the 200-day Exponential Moving Average (EMA) around 1.0900. On the upside, the 20-day EMA at 1.1075 and the September high around 1.1200 will be major resistance zones.

Economic Indicator

Nonfarm Payrolls

The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.

Why it matters to traders?

America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.

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