EUR/USD: Traders Waiting for More Directional Signals from U.S. Data

EUR/USD Highlights

• ECB interest rate hike had limited impact on the euro, markets skeptical of further tightening.
• ECB President Christine Lagarde signaling more tightening to come
• Investors anticipate Fed interest rate cuts in the second half of this year.

EUR/USD Overview

On Friday, the EUR/USD had a relatively flat performance, with the euro holding below recent one-year peaks. The single-currency initially saw the dollar gain against the euro, but the greenback later gave back those gains.

The release of important jobs gains and wage growth data for April beat economists’ forecasts. Employers added 253,000 jobs, exceeding the forecast of a 180,000 gain, and U.S. average hourly earnings rose by 4.4% annually, above the expected 4.2% increase.

However, the data also showed downward revisions for March. March’s job numbers were revised down from 236,000 to 165,000, leading some to believe that the headline number was not as strong as it appeared.

ECB Rate Hike Impact Limited

The ECB’s interest rate increase on Thursday had a limited impact on the euro, with ECB President Christine Lagarde signaling more tightening to come, but financial markets not fully buying her view on further rate increases. Although the ECB raised interest rates by 25 basis points, it noted that past moves were having an impact on the economy, leading markets to pare back their expectations on how much further rates would rise.

Investors Anticipate Fed Rate Cuts

Investors are pricing in the likelihood of interest rate cuts by the Fed in the second half of this year. The dollar has fallen since September 2022 as investors anticipate the Fed’s interest rate cuts. The Fed raised rates by 25 basis points to 5% to 5.25% on Wednesday but dropped from its policy statement language saying that it “anticipates” further rate increases would be needed. While the economy is slowing, some investors are hesitant to become too bearish on the dollar.

Currency Markets Await Directional Signals

Overall, the currency markets were in a holding pattern on Friday, with traders waiting for more directional signals from U.S. data. The resolution ultimately is for consistently weaker U.S. data and a weaker dollar, and a more dovish Fed, according to analysts. Fed funds futures traders are pricing in around 75 basis points of cuts by year-end.

Short-Term Outlook

Based on the facts in this article, the short-term forecast for the EUR/USD currency pair is likely to remain range-bound with a slight bullish bias.

The release of the better-than-expected jobs gains and wage growth data for April may provide some support for the dollar in the short term, but the downward revisions for March suggest that the U.S. economy may not be as strong as previously thought.

Moreover, the likelihood of Fed interest rate cuts in the second half of this year may weigh on the dollar’s performance. The ECB’s interest rate increase and President Lagarde’s hawkish comments may provide some support for the euro, but the impact may be limited due to the ECB’s acknowledgement that past rate moves are impacting the economy.

Overall, the currency markets may remain cautious until more directional signals from U.S. data become available.

Technical Analysis

The EUR/USD trades around 1.0965 pivot, indicating a weak short-term trend amid a strong long-term trend. A breakout above the pivot may signal a near-term rally to 1.1141 resistance. However, a breakdown may lead to downside acceleration towards 1.0834 support.