London, Thursday, 02 June 2022
The EUR/USD pair recovered on Thursday, but was unable to break above 1.0700 or its 50-Day Moving Average, which was just above it at 1.0723, and has since dropped back to trade just below 1.0700. Despite this, the pair is still up approximately 0.5 percent on the day, as the US dollar eases across the board on a fall from earlier weekly highs in US rates.
On Wednesday, the dollar gained ground after stronger-than-expected US ISM Manufacturing PMI readings for May, but a barrage of employment data on Thursday (Q1 Unit Labor Cost, May ADP Employment Change, and weekly jobless claims) failed to elicit a similar reaction. That's hardly surprising, considering the forthcoming release of the official US labour market data for May on Friday, which is preventing currency market participants from making large dollar wagers based on labour market considerations for the time being.
The EUR/USD pair is now trading with only minor losses for the week, with the pair continuing to be supported by hot Eurozone inflation numbers that showed price pressures reaching new highs last month. The latest inflation data suggests that the ECB will raise interest rates by 50 basis points at its July meeting, with some even speculating that the ECB would deviate from its recent guidance and raise rates even sooner (i.e. this month?).
Hot Eurozone inflation, a hawkish ECB, and a growing perception that US inflation may have peaked since April CPI and Core PCE data were posted last month, easing the Fed's pressure to tighten so rapidly in H2 2022 and 2023, have been important factors boosting EUR/USD in recent weeks. The pair is about 3.5 percent higher as of Thursday versus mid-May lows in the mid-1.0300s.
However, if the US employment report on Friday reveals that pay growth is heating up again, there's a chance that USD strength will be reignited. Labor market changes that increase the likelihood of high US inflation becoming ingrained (such as strong wage rise) will prompt the Fed to take its foot off the monetary accelerator and press harder on the brakes. The EUR/USD bears will be looking for a drop back to the 21DMA around 1.0600 in this scenario.
(Update by: The Decision Maker - Finance editors)