EUR/USD bounces after NFP misfire pummels Greenback

EUR/USD bumps back over 1.0900 after bad US NFP print.
Broad-market concerns of a US slowdown jumped on Friday.
Coming up next week: US ISM Manufacturing PMI, EU Retail Sales

EUR/USD caught a ride higher on Friday after the Greenback got pummeled following a bad data beat in US Nonfarm Payroll (NFP) figures. Market fears of an accelerating economic slowdown in the US sparked a firm risk-off bid throughout global markets, but with US data going too far into the red too fast, the US Dollar got caught up in the stampede and tumbled across the board.

Forecasting the Coming Week: Focus remains on data and rate cut bets

The latest US NFP labor data revealed that the US added 114K net new jobs in July, falling short of the expected 175K. Additionally, the previous month's figure was revised down to 179K from the initial 206K. The US Unemployment Rate also increased to 4.3%, the highest level since November 2021, while the U6 Underemployment Rate rose to 7.8% from 7.4% as employed individuals faced challenges in securing jobs with sufficient hours.

Average Hourly Earnings growth slowed to 0.2% month-over-month, below the anticipated 0.3%, and the year-over-year wages growth decreased to 3.6% from the previous 3.8%.

Friday’s US NFP labor data dump showed the US added 114K net new jobs in July, well below the forecast 175K and the previous month’s figure was revised to 179K from the initial print of 206K. The US Unemployment Rate also ticked higher to 4.3%, the highest reading since November of 2021, while the U6 Underemployment Rate rose to 7.8% from 7.4% as employed people struggle to find jobs that provide enough hours.

Average Hourly Earnings growth also eased to 0.2% MoM from the expected hold at 0.3%, with YoY wages growth cooling to 3.6% from the previous 3.8%.

Economic Indicator

Nonfarm Payrolls

The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.

Why it matters to traders?

America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.

With US economic data turning broadly sour, investors extended a two-day decline on growing fears of a broad recession within the domestic US economy, sparking a flight out of risk assets and sending equity indexes broadly lower. According to the CME’s FedWatch Tool, rate traders have fully priced in a rate cut in September, with 70% odds of a double-cut for 50 basis points when the Fed gives its rate call on September 18.

Coming up next week, the US will see July’s ISM Manufacturing Purchasing Managers Index (PMI) Figures on Monday, which is forecast to increase to 51.0 MoM and cross back over into expansion territory compared to June’s contractionary 48.8. Pan-European Retail Sales for the year ended in June are slated for early Tuesday, and median market forecasts expect a slight cooling to 0.2% from the previous 0.3%.

EUR/USD technical outlook

The Fiber’s Friday breakout shot EUR/USD back out the top end of a sloppy descending channel on daily candlesticks, bit price action still has ground to cover before recovering enough ground to make another attempt at cracking through 1.0950.

If bidders are able to extend momentum, EUR/USD is on pace to bake in a technical rejection from the 200-day Exponential Moving Average (EMA) at 1.0802, while sellers will be looking to push bids back down into a short side move back towards the last swing low below 1.0700.

EUR/USD daily chart

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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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