EUR/USD rises to near 1.0800 ahead of US NFP and French elections outcome

EUR/USD moves higher to near 1.0800 as the US Dollar declines amid deepening concerns over the US labor market.
Investors remain uncertain about when the ECB will cut interest rates further.
Market participants shift focus to the US NFP and French elections outcome.

EUR/USD jumps to near the round-level resistance of 1.0800 in Thursday’s European session. The major currency pair strengthens as the US Dollar (USD) is facing severe pressure due to cooling United States (US) labor market strength and deteriorating economic health. Meanwhile, the trading volume appears to be light due to a holiday in the US markets on account of Independence Day.

On Wednesday, the US ADP Employment data showed that labor demand in the private sector unexpectedly cooled in June. Private employers hired 150K job-seekers, while economists estimated that the number of fresh payrolls would be higher at 160K from the prior release of 157K, upwardly revised from 152K.

Signs of easing labor market conditions were also exhibited by Initial Jobless Claims data for the week ending June 28. The number of individuals applying for jobless claims for the first time came in higher at 238K than estimates of 235K and the former release of 233K.

Also, the economic health of the US economy appears to be deteriorating as the ISM Services Purchasing Managers’ Index (PMI), a measure of service sector activity, contracted to 48.8 from expectations of 52.5 and the prior release of 53.8. A figure below the 50.0 threshold is itself considered as contraction in service activities. Other sub-components such as Prices Paid and New Orders Index were weaker than their former readings.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, looks fragile near 105.30 ahead of the US Nonfarm Payrolls (NFP) data for June, which will be published on Friday.

Daily digest market movers: EUR/USD adds more gains as US Dollar edges lower

EUR/USD gains to near 1.0800 ahead of the second round of legislative elections in the Eurozone’s second-largest economy, France, on Sunday. After suffering a defeat by the Marine Le Pen-led-far right National Rally party, a coalition by the Central Alliance led by French President Emmanuel Macron and the left wing moved to a tactical withdrawal of at least 200 candidates from Sunday’s parliamentary elections in an attempt to thwart the far right from gaining an absolute majority.
An attempt to block the far right from winning a majority in the legislative elections has limited the downside in the Euro. Investors worry that the formation of a new government would favor expansionary fiscal policies, which will widen the already vulnerable financial crisis in France.
On the monetary policy front, International Monetary Fund (IMF) European Department Director Alfred Kammer said on Wednesday that the latest Eurozone inflation figures confirm that disinflation remains on track to the European Central Bank (ECB) target of 2% and the bank has more room to cut interest rates further. However, investors are more interested in knowing whether the ECB will extend the rate-cutting cycle in its next meeting, scheduled for July 18.
Preliminary Eurozone inflation report for June showed that annual headline Harmonized Index of Consumer Prices (HICP) softened expectedly to 2.5%. While the core HICP that excludes volatile items grew steadily by 2.9%.

Technical Analysis: EUR/USD aims to stabilize above 200-day EMA

EUR/USD trades inside Wednesday’s trading range near 1.0800. The major currency pair has climbed above the 20-day and 50-day Exponential Moving Averages (EMAs), which trade around 1.0750 and 1.0770, respectively, suggesting a steady near-term outlook. The long-term appeal of the shared currency pair has also improved 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.

Also, the 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element in assessing the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels because low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given their significance as a gauge of the health of the economy and their direct relationship to inflation.

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