EUR/USD trades cautiously as US NFP takes centre stage
- EUR/USD trades with caution around 1.0300 as investors await the US NFP data for December, which will influence the Fed interest rate outlook.
- US President-elect Donald Trump is expected to declare a national economic emergency.
- The Euro gains despite traders price in four interest rate cuts by the ECB this year.
EUR/USD trades subduedly around 1.0300 in Friday’s European session. The major currency pair trades with caution as investors await the United States (US) Nonfarm Payrolls (NFP) data for December, which will be published at 13:30 GMT. Investors will pay close attention to the US official employment report as it will influence market expectations about when the Federal Reserve (Fed) will deliver its first interest rate cut this year.
Economists expect that fresh 160K workers were added to the labor force in December, fewer than 227K in November. The Unemployment Rate is estimated to have remained steady at 4.2%. Month-on-month Average Hourly Earnings are expected to have risen at a slower pace of 0.3% from the former release of 0.4%, with annual figures growing steadily by 4%.
Signs of cooling labor market conditions would force traders to pare bets supporting the Fed to keep interest rates unchanged in the March meeting at their current range of 4.25%-4.50%. Meanwhile, traders are confident that the central bank will maintain the status quo later this month, according to the CME FedWatch tool.
Ahead of the US NFP data, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is flattened above 109.00. The performance of the US Dollar (USD) has remained firm as President-elect Donald Trump is expected to declare a national economic emergency to provide legal justification for preparing an import tariff plan for the nation’s allies and adversaries, CNN reported.
Daily digest market movers: EUR/USD trades flat ahead of US labor market data
- EUR/USD is expected to be purely driven by the US Dollar on Friday as the US NFP data is on the horizon. Meanwhile, the Euro (EUR) is outperforming against a majority of its peers, except the Japanese Yen (JPY). The Euro rises even though traders have priced in four interest rate cuts by the European Central Bank (ECB), which will come in every meeting by summer.
- ECB policymakers are comfortable with firm dovish bets as inflationary pressures in the Eurozone are broadly under control. However, price pressures rose expectedly in December. On Wednesday, ECB policymaker and Governor of the Bank of France François Villeroy said that price pressures were expected to tick higher in December, however, interest rates will continue heading towards the neutral rate “without a slowdown in the pace by summer” if the upcoming data confirm that the “pullback in price pressures won’t continue”.
- Meanwhile, a weak Eurozone economic outlook has also boosted bets supporting more interest rate cuts. Investors expect the old continent to face a trade war with the US as incoming policies from President-elect Donald Trump will be highly protectionist and weigh on the Eurozone’s export sector.
Technical Analysis: EUR/USD holds 1.0200
EUR/USD trades near the key support plotted from the September 2022 high of 1.0200 on the weekly chart. The outlook of the major currency pair is broadly bearish as the 20-week Exponential Moving Average (EMA) at 1.0595 is declining.
The 14-week Relative Strength Index (RSI) slides to near 30.00, indicating a strong downside momentum. However, a slight recovery cannot be ruled out as the momentum oscillator has turned oversold.
Looking down, the pair could find support near the round level of 1.0100. Conversely, the January 6 high of 1.0437 will be the key barrier fora the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, 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 Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, 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 but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if 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 especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release 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 over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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