Euro Slumps as US Dollar Regains Momentum Ahead of NFP. Is EUR/USD in Peril?

EUR/USD FORECAST:

• Euro tumbles dragged down by broad-based U.S. dollar strength in the FX market
• EUR/USD maintains a negative outlook in the near-term
• The U.S. employment report will be a source of volatility for financial markets on Friday

Most Read: US Dollar Price Action Setups – EUR/USD, GBP/USD, USD/CAD, USD/JPY

EUR/USD slumped more than 0.8% to trade near the 0.9800 handle on Thursday, clobbered by broad-based U.S. dollar strength in the FX space, amid rising Treasury rates ahead of the September non-farm payroll release scheduled for Friday morning. In early trading, the U.S. 10-year yield rose nearly 10 basis points to 3.85% after Minneapolis Fed President Neel Kashkari stated that the central bank is “quite a ways away” from pausing its tightening campaign, noting that policymakers will not be deterred by the turmoil on Wall Street.

Kashkari’s comments follow a string of hawkish remarks from other officials, including Mary Daly, who yesterday said that investors are wrong in seeing monetary policy easing in 2023, dismissing “pivot” talks outright as core inflation appears to be broadening.

With the FOMC committed to slowing the economy to bring inflation down at all costs, at least judging by the prevalent rhetoric, U.S. yields should remain biased to the upside in the near term. This situation may exacerbate the stress in financial markets seen recently, fueling risk aversion and weighing on high-beta currencies.

In the current environment, the U.S. dollar is likely to command strength against its top peers, preventing the euro from staging a meaningful rebound. This is not to say that the greenback is immune to a bearish reversal, as this scenario could still play out, especially if incoming data surprises to the downside. For this reason, it is imperative that traders keep a close eye on Friday’s U.S. employment survey.

Turning to the nonfarm payrolls report, consensus expectations suggest that U.S. employers added 250,000 workers last month, following a 315,000 increase in jobs in August. For U.S. dollar selling to materialize, there would need to be strong signs that the labor market is cracking under the weight of tightening financial conditions, as this could cause the central bank to blink next year.

However, if hiring remains resilient, as shown in the September ISM services survey and the September ADP numbers, traders should start to forget about a potential pivot. Why? Because tight labor markets will keep wage pressures elevated and bolster aggregate demand, precluding inflation from returning to the 2% target anytime soon. This, of course, will translate into further hikes, extending the reign of the U.S. dollar.

EUR/USD TECHNICAL ANALYSIS

After the recent pullback, EUR/USD appears to be approaching a key support in the 0.9750/0.9730 as shown in the 4-hour chart below. If buyers fail to defend this floor and prices break through it decisively, we could see a move towards the September 30 swing low at 0.9731. On the other hand, if the bulls return and trigger a solid rebound, initial resistance lies at 0.9860, near the 50% Fib retracement of the September’s decline. If this technical barrier is taken out, the focus shifts to 0.9930.

EUR/USD TECHNICAL CHART

EUR/USD Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX