EUR/USD: Trader Focus Shifts to Next Week’s Fed, ECB Meetings

Highlights

• Euro underpinned by Thursday’s U.S. jobless claims report.
• Market awaits central bank meetings of the Federal Reserve and European Central Bank.
• Uncertainty remains regarding future interest rate decisions.

Overview

The Euro experienced a slight decline against the U.S. Dollar on Friday, following a significant increase in the previous session. Yesterday’s rally can be attributed to a drop in U.S. Treasury yields, driven by a surge in weekly jobless claims. This development has raised hopes that U.S. interest rates may soon reach their peak. With central bank meetings scheduled for the upcoming week, including the U.S. Federal Reserve and the European Central Bank (ECB), market participants eagerly await the decisions to be made.

Euro Surges on Weak US Job Market

On Thursday, the Euro reached a more than two-week high of 1.0787 against the Dollar, potentially breaking a four-week losing streak and gaining 0.6% for the week. However, released data showed a significant increase in Americans filing new claims for unemployment benefits, reaching the highest level in over 1½ years. Although the data covered the Memorial Day holiday, which may have introduced some volatility, it weakened the U.S. dollar against the Euro. Investors interpreted this as a signal of a slowing U.S. labor market, bringing jobless claims close to a two-year high. This has led to concerns about potential weakness in the U.S. economy and a more cautious approach from the Federal Reserve regarding interest rate hikes. The question arises whether this data is an isolated occurrence or an initial warning sign of a weaker-than-expected U.S. economy.

Euro Could Firm if Fed Pauses

Looking ahead, market focus shifts to the upcoming central bank meetings. The Federal Reserve takes center stage, with money markets leaning towards a pause in rate hikes. However, there is a 25% chance priced in by investors that the U.S. central bank may opt for a 25 basis points rate increase. Given the slowdown in the U.S. economy, the Federal Reserve has room to pause its tightening campaign after consecutive interest rate hikes totaling 500 basis points. The key question for the markets is whether the Federal Reserve will skip a rate hike in June and resume tightening measures in July.

ECB Expected to Maintain Hawkish Stance

Contrastingly, analysts expect the European Central Bank to increase Euro Zone rates by 25 basis points to 3.50% during its meeting on Thursday. Despite a softening in headline inflation, the anticipation of this move persists due to the ongoing rise in core inflation. It is likely that the ECB will maintain a hawkish stance, aligning with market expectations. However, the focus remains on the Federal Reserve’s decisions and their potential implications.

A recent Reuters poll of economists indicates that a clear majority expects the ECB to raise its key interest rates by 25 basis points on June 15, followed by another increase in July. However, the consensus suggests that the ECB may pause for the remainder of the year due to persistent inflationary pressures.

All Eyes on Fed, ECB

As the financial world awaits the outcomes of the central bank meetings, traders and investors will closely analyze the decisions made by both the Federal Reserve and the European Central Bank. These decisions are expected to shape market sentiment and determine the future direction of the Euro against the U.S. Dollar.

Technical Analysis

The EUR/USD is edging lower on Friday despite a spike to the upside the previous session. Today’s setback, following yesterday’s strong rally, suggests that traders are respecting 1.0807 (PIVOT).

The inability to overcome 1.0807 (PIVOT) will signal the presence of strong sellers. This could trigger a resumption of the downmove with 1.0522 (S1) the next support target.

With the  trend down, sellers are likely to come in on the first test of 1.0807 (PIVOT). However, overtaking it will indicate strong counter-trend buying with 1.0979 (R1) the next target.