- Weak U.S. employment data supports the case for a 25 basis point interest rate cut.
- The European Central Bank is anticipated to lower benchmark rates by 25 basis points.
- EUR/USD declined after reaching a peak of 1.1154, with bearish sentiment strengthening
The EUR/USD pair reversed its direction after dropping to 1.1025, gaining some ground mid-week to stabilize near 1.1100, following a peak of 1.1154 on Friday. Market attention remained on macroeconomic data that could influence upcoming central bank policy decisions. In the Eurozone, the focus was on growth-related figures, while U.S. investors monitored updates on the labor market.
Modest European Progress Ahead of the ECB Meeting
Slow economic progress in the EU continued to limit the Euro’s strength. The manufacturing sector showed only modest improvement in August, with the Hamburg Commercial Bank (HBOC) revising the Manufacturing Purchasing Managers Index (PMI) upward to 45.8, still signaling economic contraction. The Services PMI was revised down to 52.9, leading to a Composite PMI of 51.0.
Additionally, the Producer Price Index (PPI) rose 0.8% in July, exceeding expectations, but fell 2.1% year-over-year. Retail Sales increased by just 0.1% in July, and the second quarter Gross Domestic Product (GDP) was revised down to 0.2% QoQ.
The European Central Bank (ECB) is expected to announce a 25 basis point cut to each of its three key interest rates on Thursday, September 12. With ECB officials emphasizing that decisions are data-dependent, this move has been largely anticipated. Inflation is approaching the ECB’s 2% target, but tepid economic growth due to restrictive policies means the rate cut is already priced in. The impact on the Euro will likely depend on any forward guidance provided by policymakers.
Aside from the ECB announcement, the EU’s economic releases are limited. The Union will publish September Sentix Investor Confidence on Monday and July Industrial Production on Friday, while Germany will release the final August Harmonized Index of Consumer Prices (HICP) estimate on Tuesday.
U.S. Employment Data Ahead of Fed Meeting
Speculative interest in the US employment data has fueled speculation that the Federal Reserve may implement a 50 basis point rate cut in mid-September. The ADP Employment Change report revealed that the private sector added 99,000 jobs in August, well below the anticipated 145,000. Concurrently, the Challenger Job Cuts report showed layoffs surged to 75,891, with year-to-date hiring at a historic low.
Additional data included Initial Jobless Claims for the week ending August 30 at 227,000, below the expected 230,000 and the previous 232,000. The JOLTS report indicated 7.67 million job openings at the end of July, short of the anticipated 8.1 million. The August ISM Manufacturing PMI rose to 47.2, below the expected 47.5, while the Services PMI exceeded expectations at 51.5, compared to the previous 51.4 and forecasted 51.1.
The Nonfarm Payrolls (NFP) report showed 142,000 new jobs created in August, falling short of the 160,000 forecast, with July’s figure revised down to 89,000. The Unemployment Rate decreased to 4.2%, as expected, with the Labor Force Participation Rate holding steady at 62.7%.
The USD fluctuated following the NFP report, reflecting data that supports a Fed rate cut but does not suggest imminent recession risks. A 25 basis point rate cut remains the most probable outcome as the Fed enters a blackout period before the September 18 policy announcement. The Fed is also expected to continue reducing its balance sheet, which has decreased from $8.9 trillion in May 2022 to around $7.1 trillion in September. The Fed will update its economic projections regarding growth, inflation, and employment.
Upcoming US data includes the August Consumer Price Index (CPI) next Wednesday, followed by the Producer Price Index (PPI) the next day. The preliminary estimate for the September Michigan Consumer Sentiment Index will be released at the end of the week.
EUR/USD technical outlook
The weekly chart for EUR/USD shows the pair holding modest gains but also recording a lower low and a lower high, which typically signals potential weakness. The pair is struggling to stay above a slightly bearish 200-period Simple Moving Average (SMA), while the 20 and 100 SMAs maintain bullish slopes below the current level. Technical indicators remain above their midlines and are inching higher, which limits bearish potential but does not indicate an imminent advance.
On the daily chart, the risk of a further decline in EUR/USD appears increased. Friday’s drop has pushed technical indicators into bearish territory, moving sharply lower within neutral levels. The pair is testing a bullish 20 SMA, with a break below this level likely to attract more selling pressure. Additionally, the 100 SMA is crossing above the 200 SMA, both converging around 1.0860, indicating a modest upward slope.
Immediate support is at 1.1040, followed by 1.0990. A fall below this level could see interim support at 1.0950 and further at 1.0900. Resistance is at 1.1145, with a clear break above this level potentially targeting the 1.1200 threshold.
