The EUR/USD pair has experienced a notable decline, hitting a multi-week low and facing continued selling pressure. This downward trend is driven by a combination of economic data, political uncertainty, and market sentiment. Below, we delve into the key factors contributing to the pair’s recent performance and explore the possible future trajectory of the EUR/USD pair.
Upbeat US NFP Data and Its Impact on Fed Rate Cut Bets
Robust Employment Growth
The US Labor Department’s closely watched monthly employment report revealed that the economy added 272K jobs in May. This figure significantly surpassed the anticipated 185K jobs and the previous month’s revised figure of 175K jobs. The impressive job growth underscores the resilience of the US labor market and suggests that the economy is on a solid footing.
The higher-than-expected job creation is a positive indicator for the US economy, as it reflects strong business activity and consumer confidence. When businesses are confident about the economic outlook, they are more likely to hire additional workers, which in turn supports consumer spending and overall economic growth.
Wage Growth
In addition to robust job growth, the report highlighted that Average Hourly Earnings increased by 4.1% over the 12 months through May, surpassing consensus estimates. Wage growth is a critical component of the labor market, as it directly impacts consumer spending power. Higher wages mean that workers have more disposable income, which can drive consumer demand and support economic expansion.
The increase in wages also suggests that employers are competing for a limited pool of available workers, which can lead to further wage increases in the future. This dynamic is indicative of a tight labor market, where demand for workers outstrips supply.
Rising Jobless Rate
Despite the positive job growth and wage data, the unemployment rate ticked up to 4.0%. While an increase in the jobless rate might seem contradictory to the strong job creation numbers, it can be explained by a rise in labor force participation. When more people enter the labor force and start looking for work, the unemployment rate can temporarily increase even if the economy is adding jobs.
The uptick in the jobless rate should be viewed in the context of the overall strength of the labor market. The combination of robust job creation and rising wages suggests that the US economy remains on a solid footing, despite the slight increase in the unemployment rate.
Fed Rate Cut Expectations
The stronger-than-expected employment data has led investors to temper their expectations for an imminent rate cut by the Federal Reserve in September. Market participants had previously anticipated that the Fed might cut interest rates to support economic growth amid concerns about a potential slowdown. However, the robust labor market data has prompted a reassessment of these expectations.
Elevated US Treasury bond yields, which reflect the market’s revised expectations for Fed policy, have bolstered the US Dollar (USD). Higher yields make US assets more attractive to investors, increasing demand for the USD and exerting downward pressure on the EUR/USD pair.
Political Uncertainty in the Eurozone
European Parliament Elections
An aggregated exit poll indicated that Eurosceptic nationalists made significant gains in the recent European Parliament elections. This outcome has added to the political uncertainty in the region, as the rise of Eurosceptic parties could lead to increased tensions within the European Union (EU) and complicate efforts to achieve greater integration.
The gains made by Eurosceptic parties reflect growing dissatisfaction with the EU among certain segments of the population. Issues such as immigration, economic inequality, and perceived loss of national sovereignty have fueled support for parties that advocate for a more critical stance toward the EU.
French Political Instability
French President Emmanuel Macron’s decision to call snap elections later this month has further increased political uncertainty in the Eurozone’s second-largest economy. The snap elections are a response to recent political developments and are seen as a way for Macron to consolidate his position and address challenges from opposition parties.
The prospect of snap elections introduces additional uncertainty, as the outcome is difficult to predict. Political instability in France, a key EU member state, can have broader implications for the Eurozone and contribute to bearish sentiment surrounding the Euro.
Impact on the Euro
The combination of political uncertainty from the European Parliament elections and the upcoming snap elections in France has weighed on the Euro. Investors are cautious about the potential for increased political instability and its impact on the Eurozone’s economic outlook. This has contributed to the downward pressure on the EUR/USD pair.
Market Sentiment and Safe-Haven Demand
Cautious Equity Markets
The cautious mood in equity markets has driven demand for safe-haven assets, including the USD. Equity markets have been characterized by volatility and uncertainty, with concerns about global economic growth, trade tensions, and geopolitical risks influencing investor sentiment.
In times of market uncertainty, investors tend to seek safe-haven assets that are perceived as more stable and less risky. The USD, as the world’s primary reserve currency, is often viewed as a safe-haven asset. This increased demand for the USD has provided additional support for the currency and weighed on the EUR/USD pair.
EUR/USD Technical Outlook
The EUR/USD pair has dropped to over a three-week low, trading around the 1.0775 region during the Asian session on Monday. The pair appears vulnerable to extending its post-NFP breakdown momentum through the 100-day Simple Moving Average (SMA).
Technical analysis suggests that the pair’s recent decline could continue if it breaks below key support levels. The 100-day SMA is an important technical indicator that traders use to assess the pair’s trend and momentum. A sustained break below this level could signal further downside for the EUR/USD pair.
Key Economic Events Ahead
FOMC Policy Decision
Traders are cautious ahead of the crucial Federal Open Market Committee (FOMC) policy decision on Wednesday. The FOMC meeting is a key event that can provide significant direction for the USD and, consequently, the EUR/USD pair. Market participants will closely scrutinize the Fed’s policy statement and any guidance on future interest rate decisions.
The FOMC’s assessment of the economic outlook and its policy stance will be critical in shaping market expectations. If the Fed signals a more hawkish stance, with a focus on maintaining current interest rates or even considering future rate hikes, it could further support the USD and pressure the EUR/USD pair.
US Consumer Inflation Figures
Ahead of the FOMC meeting, traders will also focus on the release of the latest US consumer inflation data. Inflation is a key economic indicator that influences the Fed’s monetary policy decisions. Higher inflation can prompt the Fed to raise interest rates to prevent the economy from overheating, while lower inflation may lead to more accommodative policies.
The consumer inflation data will provide insights into price pressures in the US economy and could influence market expectations for Fed policy. Strong inflation data could bolster the case for maintaining or raising interest rates, supporting the USD, while weaker inflation data could revive expectations for a rate cut.
Summary
Downside Risks
The combination of strong US employment data, elevated US Treasury yields, and political uncertainty in the Eurozone suggests that the path of least resistance for the EUR/USD pair is to the downside. The robust US labor market data has tempered expectations for a Fed rate cut, supporting the USD and exerting downward pressure on the EUR/USD pair.
Political uncertainty in the Eurozone, particularly the gains made by Eurosceptic parties in the European Parliament elections and the upcoming snap elections in France, has added to the bearish sentiment surrounding the Euro. Investors are cautious about the potential for increased political instability and its impact on the Eurozone’s economic outlook.
Caution Among Traders
Despite the bearish outlook, traders might refrain from placing aggressive directional bets ahead of the key FOMC policy decision and the release of US inflation figures. The upcoming economic events are critical in shaping market expectations and could provide significant direction for the EUR/USD pair.
Traders are likely to adopt a cautious approach, waiting for more clarity on the Fed’s policy stance and the latest inflation data before making significant trading decisions. The outcome of these events will be pivotal in determining the pair’s near-term trajectory.
