EUR/USD Rallies Amid Fed Rate Cut Expectations and U.S. Data Insights
On Friday, EUR/USD saw a rally, likely to remain elevated as investor expectations for Fed rate cuts were bolstered by the latest U.S. data. The June core PCE came in at +0.2% month-on-month, slightly above the consensus of +0.1%. Despite the higher result, the reported number was rounded up from +0.1818%, which may have lessened its impact. Personal income growth disappointed, coming in at +0.2% compared to the +0.4% estimate and May’s +0.4%, possibly indicating a weaker jobs market.
Following the data release, U.S. yields and the dollar softened as investors continued to expect more Fed rate cuts in 2024 than the Fed’s own projections suggest. Short-term rates markets show nearly a 90% probability of a total 75 basis points cut by the Fed in 2024. The dollar’s yield advantage over the euro decreased as German-U.S. spreads tightened, supporting EUR/USD. Attention now shifts to the July employment report due next Friday. A Reuters poll estimates July non-farm payrolls will fall to 175,000 from June’s 206,000, with the unemployment rate holding at 4.1%. A weaker payrolls report and a higher unemployment rate could lead to a sharp decline in yields and the dollar, enhancing expectations for a less restrictive Fed policy.
In New York, EUR/USD opened near 1.0855 after trading at 1.08425 overnight on EBS, with the rally extending throughout the day. Yields fell and spreads tightened following the PCE and spending data. EUR/USD rose above the 5-DMA, reaching 1.0868 and ending up 0.14% late in the day. Equity and gold rallies helped keep riskier assets buoyed. However, EUR/JPY’s drop towards 167.00 and the USD/CNH rally likely limited EUR/USD’s upside.
Technical indicators offer some support for EUR/USD bulls, with rising RSIs and the pair holding above the 21- and 200-DMAs. Nevertheless, the ongoing consolidation of the decline from the July 17 high may concern some investors. The upcoming Fed meeting and Powell’s press conference will draw significant attention next week. Additionally, key data risks include the U.S. June JOLTS report, July ADP employment report, and the July non-farm payroll report. These events will be crucial in shaping investor expectations and the direction of EUR/USD.
