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EUR/USD Outlook: Euro Clobbered as US Dollar Mounts Solid Recovery Ahead of NFP

EUR/USD Outlook: Euro Clobbered as US Dollar Mounts Solid Recovery Ahead of NFP

Diego Colman, Contributing Strategist
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  • EUR/USD gives up its Fed-induced advance and tumbles about 1% on Thursday
  • Broad-based U.S. dollar strength, risk-off sentiment on Wall Street, and concerns about the European economy weigh on the common currency
  • Friday’s U.S. nonfarm payroll results could guide near-term EUR/USD price action

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Most Read: US Dollar Price Action Setups - EUR/USD, GBP/USD, AUD/USD and USD/JPY

The euro sank on Thursday and lost most of its FOMC-induced gains, dragged down by broad-based U.S. dollar strength, higher U.S. yields, risk-off sentiment in the equity market, and growing concerns about the outlook for the European Union after March German factory orders tumbled more than expected. At noon, EUR/USD was 1% lower, trading at 1.0510 and steadily approaching its May’s low. The sharp slowdown in Germany, the country with the largest GDP in the bloc, raises the question of how quickly and forcefully the ECB can withdraw stimulus without strangling activity and pushing the regional economy into a deep recession.

Over a medium-term horizon, monetary policy divergence between the ECB and the Fed and the fallout from the Ukrainian war may continue to weigh on the euro against the greenback, possibly creating the right conditions for exchange rate parity between the two currencies, but that story is for another day.

Focusing on the near term, all eyes will be on the U.S. economic calendar on Friday, when the U.S. Bureau of Labor Statistics releases the latest nonfarm payrolls data. According to analysts surveyed by Bloomberg News, the North American economy created 391,000 jobs in April, down slightly from the 431,000-increase seen in March. With this result, the unemployment rate is seen inching down from 3.6% to 3.5%, matching the pre-pandemic low set in early 2020.

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Although the pace of hiring likely remained healthy by historical standards, the data could underwhelm expectations tomorrow. During the week, various economic surveys, such as ISM Manufacturing and ISM Services, revealed a sharp deceleration in their employment component amid intensifying labor shortages. To add insult to injury, the ADP report also surprised on the downside after the private sector added only 247,000 workers last month, almost half below the median forecast.

Any sign of cooling in the labor market could help bolster bets that the Federal Reserve will not be extremely aggressive in removing policy accommodation in its efforts to tackle sky-high inflation. This could lead bond traders to recalibrate their overly hawkish expectations, prompting a pullback in U.S. Treasury yield and weighing on the US dollar, albeit temporarily. However, for the latter scenario to materialize, the rapid growth in U.S. average hourly earnings witnessed recently must begin to moderate to avoid sparking “wage spiral” fears, an economic phenomenon in which price increases become pervasive as consumers demand higher compensation.

All in all, the euro could experience a brief respite in the coming days, allowing for a moderate rebound in the EUR/USD exchange rate, but the moves are unlikely to be sustained considering the current macroeconomic backdrop and the growing challenges for the EU economy.

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From a technical perspective, the EUR/USD’s outlook remains bearish. The relentless decline seen recently, the pattern of lower highs and lower lows, and price trading below key moving averages are all discouraging signals for the common currency. That said, if the pair accelerates its retreat, support can be seen near the May’s low at 1.0471, but if sellers manage to breach this floor, we can’t rule out a move towards the 2017 low at 1.0340. On the flip side, if buyers return and spark a bullish reversal, initial resistance appears around 1.0645, this week’s peak. On further strength, the focus shifts up to 1.0730, followed by 1.0825.

EUR/USD Bullish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -5% 9% 0%
Weekly -1% 4% 1%
What does it mean for price action?
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EUR/USD Chart Prepared Using TradingView


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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.