EUR/USD exhibits strength as slacked US labor market weighs on US Dollar

EUR/USD exhibits strength as growing speculation for Fed rate cuts in September weighs on the US Dollar.
US labor market conditions appear to have lost momentum.
Unexpected progress by the left wing in French elections has increased uncertainty over the economy’s fiscal outlook.

EUR/USD stabilizes above the round-level support of 1.0800 in Monday’s European session. The major currency pair remains firm as the US Dollar (USD) is under pressure due to growing speculation that the Federal Reserve (Fed) will start lowering interest rates at the September meeting.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near a three-week low around 104.85.

Market expectations for Fed interest rate cut bets in September have increased further amid evidence that the United States (US) labor market is losing momentum. The US Nonfarm Payrolls (NFP) report for June pointed to a slowdown in labor demand as revised estimates showed that the number of individuals hired in April and May was lower by 110K than previously estimated. Also, the Unemployment Rate surprisingly rose to 4.1% from the consensus and the former release of 4.0%.

Also, upside risks to inflation ease as wage growth momentum appears to have slowed in June. The US NFP report showed that Average Hourly Earnings, a measure of wage growth, declined expectedly on a monthly and annual basis.

Cooling labor market strength favors early Fed rate cut bets. According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that the probability of rate cuts in September has increased to 75.8% from 64% a week ago.

Going forward, investors will keenly focus on the US Consumer Price Index (CPI) report for June, which will be published on Thursday. Investors will pay close attention to inflation to know whether the disinflation process, which paused in the first quarter, has resumed.

Daily digest market movers: EUR/USD clings to gains despite uncertainty over French's fiscal policy outlook

EUR/USD clings to gains even though the Euro’s outlook appears uncertain as exit polls show that a coalition government will form in the Eurozone’s second-largest economy, France. Polls showed that the left wing, also known as the New Popular Front, led by Jean-Luc Mélenchon, unexpectedly gained the upper hand with President Emmanuel Macron's centrist alliance and Marine Le Pen-led far-right National Rally as runner-ups.
The absence of any party gaining an outright majority has deepened uncertainty over France’s fiscal outlook. This would force the Centralist Alliance to enter into severe negotiations with the Left Wing to distribute new ministries and the election of a new Prime Minister. Meanwhile, Jean-Luc Mélenchon proposed that French PM Macron should resign and the mandate should be given to the left wing to manage the economy.
On the monetary policy front, deepening risks of inflation remaining sticky have diminished expectations about the European Central Bank (ECB) delivering subsequent rate cuts. ECB officials are scheduled to meet on July 18 to make decisions on interest rates.
Preliminary Eurozone Harmonized Index of Consumer Prices (HICP) grew steadily by 2.9% year-on-year in June as service inflation remained sticky at 4.1%. In the ECB Forum on Central Banking at Sintra, Portugal, ECB President Christine Lagarde said, “The disinflationary path is going to continue, but we need to be particularly attentive to services.”

Technical Analysis: EUR/USD holds ground above 1.0800

EUR/USD gains ground above 1.0800. The major currency pair strengthens after stabilizing above the 20-day and 50-day Exponential Moving Averages (EMAs), which trade around 1.0750 and 1.0770, respectively. The overall trend of the shared currency pair has also strengthened as it has jumped above the 200-day EMA, which trades around 1.0800.

The Symmetrical Triangle formation on the daily timeframe exhibits a sharp volatility contraction, which indicates low volume and narrow ticks.

The 14-day Relative Strength Index (RSI) reaches 60.00. Should the bullish momentum be triggered if it breaks above 60.00?

Economic Indicator

Consumer Price Index ex Food & Energy (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

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