EUR/USD Forecast: How US Labor Market and Fed Decisions Influence Exchange Rate Trends

Highlights

• The EUR/USD declined by 0.38% on Tuesday, ending the session at $1.05744.
• US labor market and consumer confidence figures sent the EUR/USD into negative territory on Tuesday.
• On Wednesday, the US labor market and the Fed interest rate decision will be the focal points.

Tuesday Overview

The EUR/USD declined by 0.38% on Tuesday. Following a 0.47% gain on Monday, the EUR/USD ended the day at $1.05744. The EUR/USD rose to a high of $1.06749 before falling to a low of $1.05574.

Macroeconomic Uncertainty to Test the EUR/USD

On Wednesday, investors may respond further to the recent GDP and inflation figures from the euro area. Weaker-than-expected GDP numbers from France and a quarterly contraction across the euro area could test buyer appetite for the EUR.

Private sector PMIs from China suggest stimulus measures are failing to reboot the economy. Cracks are also forming in the US economy, signaling a further deterioration in the macroeconomic environment before any recovery.

On balance, the ECB may need to cut rates sooner than the Fed. Resilience in the US economy would allow the Fed to keep rates higher for longer. A euro area recession and softening inflation will be considerations for the ECB over the near term.

US Labor Market and the Fed to Take Center Stage

On Wednesday, ADP nonfarm employment and JOLTs Job Openings will set the tone for the session. A tighter US labor market supports wage growth and consumption.

An upward trend in consumption would fuel demand-driven inflationary pressures, forcing the Fed to keep rates higher for longer. An elevated interest rate environment impacts borrowing costs and disposable income. This leads to a pullback in spending.

Economists forecast the ADP to report a 150k increase in nonfarm payrolls in October vs. 89k in September. However, economists expect job openings to decline from 9.61 million to 9.25 million in September. Beyond the headline figure, a decline in quit rates could signal a weakening labor market.

A deteriorating labor market outlook could force consumers to curb spending, easing demand-driven inflation.

While the numbers will draw investor interest, the Fed interest rate decision and press conference will be the focal points.

The markets expect the Fed to leave interest rates at 5.5%. Barring a surprise Fed rate hike, the Fed press conference will move the dial. Investors must consider comments referencing the economic, inflation, and monetary policy outlook.

Short-Term Forecast:

The near-term trends for the EUR/USD hinge on US labor market numbers and Fed monetary policy goals. A hawkish Fed press conference and upbeat labor market figures could pressure the EUR/USD and bring sub-$1.05 into play. On Friday, the US Jobs report and ISM Non-Manufacturing PMI will also be pivotal.

EUR/USD Price Action

Daily Chart

The EUR/USD sat below the 50-day and 200-day EMAs, affirming bearish price signals.

A EUR/USD break above the $1.06342 resistance level and 50-day EMA would support a move toward the 200-day EMA. US labor market data and the Fed will be focal points on Wednesday.

However, a EUR/USD drop below the $1.05173 support level would give the bears a run at the trend line.

The 14-period Daily RSI, 47.38, indicates a EUR/USD fall through the $1.05173 support level before entering oversold territory.

4-Hour Chart

The EUR/USD remains below the 50-day and 200-day EMAs, reaffirming bearish price signals.

A EUR/USD break above the 50-day EMA would support a move to the 200-day EMA and the $1.06342 resistance level.

However, a drop below $1.05500 would bring the $1.05173 support level and trend line into play.

The 14-period RSI on the 4-hour chart, 46.73, suggests a EUR/USD fall below the $1.05173 support level before entering oversold territory.