On Friday, June 5, the Dollar Index (DXY) hit a three-week low, while the euro showed its largest weekly gain against the dollar in a year. This was due to the US not performing as well as expected and Europe not faring as poorly.
Disappointing private sector employment statistics from ADP (150K versus the forecasted 163K and previous 157K) and an increase in repeated jobless claims (238K versus 234K) for the ninth consecutive week indicate a cooling labour market. The slowdown in business activity in the service sector, the fastest in four years, and the drop in the ISM Index from 53.8 to 48.8 points, below the threshold of 50.00, suggest that the US economy is not as smooth as the Federal Reserve (Fed) would like.
The FOMC’s June meeting minutes mentioned that monetary policy should be ready to respond to economic issues, a sentiment echoed by Fed Chairman Jerome Powell. Consequently, this gloomy macroeconomic data increased the likelihood of a monetary expansion cycle and interest rate cuts in September from 63% to 73%. Derivatives are almost certain that there will be two 25 basis point (bp) cuts in 2024, lowering the rate from 5.50% to 5.00%. This caused US Treasury yields and the DXY to drop, while stock indices and EUR/USD rose. The S&P500 set its 33rd record this year, and EUR/USD reached a high of 1.0842 on July 5.
The euro was also bolstered by the situation in France. The left-wing “New People’s Front” (NFP) and the government bloc “Together for the Republic” (Ensemble) joined forces to prevent the right-wing from gaining power, which might end successfully. If the right-wing “National Rally” (RN) does not gain an absolute majority in the new parliament after the second round of elections, there will be no confrontation with the EU or Frexit (analogy with British Brexit).
Polls indicate the right-wing will secure 190 to 250 out of 577 seats, while 289 are needed for an absolute majority. The second round of elections will be held on Sunday, July 7, which might cause gaps in euro pairs on Monday.
Last week, the euro was also supported by the European Central Bank, or rather, by the minutes of its June Governing Council meeting. On one hand, 25 out of 26 Council members voted for a 25 basis point rate cut. However, this decision was made with several caveats concerning still high wage growth rates and the persistence of inflation, which resists and does not want to drop to the target level of 2.0%.
Preliminary June data showed that the CPI decreased only by 0.1% from 2.6% to 2.5%, and the Core CPI remained at 2.9% (y/y), above the consensus forecast of 2.8%. ECB officials fear the CPI might rise due to geopolitical tensions, supply chain disruptions, raw material and energy price increases, and other factors. This almost rules out a rate cut at the ECB Governing Council meeting on July 18 and suggests only one act of monetary expansion in the second half of 2024.
Key US labour market data released at the end of the week on Friday, July 5, could change the dollar’s position and the EUR/USD dynamics. According to the Bureau of Labour Statistics (BLS), non-farm payrolls (NFP) increased by 206K in June, lower than May’s 218K but above the forecast of 190K. Other data showed the unemployment rate rose from 4.0% to 4.1%, and wage inflation dropped from 4.1% to 3.9% (y/y).
After the publication of this data, EUR/USD ended the week at 1.0839. However, this does not mean it will start the next week at this level. Traders are closely watching the French elections and the political situation related to the November US presidential elections. Biden’s interview with ABC News at 00:00 GMT on Saturday, July 6, when markets are closed, could also impact dollar pairs.
As of the evening of July 5, analysts’ forecasts for the near future are as follows: 55% predict the pair will rise, 45% foresee a fall. In technical analysis, all trend indicators and oscillators on D1 are in favour of the euro, although a quarter indicate the pair is overbought. The nearest support is in the 10790-10805 zone, followed by 1.0725, 1.0665-1.0680, 1.0600-1.0620, 1.0565, 1.0495-1.0515, 1.0450, and 1.0370. Resistance zones are at 1.0890-1.0915, 1.0945, 1.0980-1.1010, 1.1050, and 1.1100-1.1140.
Notable events in the upcoming week include Jerome Powell’s testimony in the US Congress on July 9 and 10, updated CPI data for Germany and the US on Thursday, July 11, and US initial jobless claims. The week will end with Germany’s retail sales data and the US Producer Price Index (PPI) and the University of Michigan Consumer Sentiment Index.
EUR/USD has shown strength due to the US economic slowdown and positive developments in Europe, especially in France. The upcoming week will be crucial for the pair as various economic data releases and political events could impact its movement. Traders are advised to closely monitor the situation to make informed trading decisions.