Original author: VT Markets
The EUR/USD pair has experienced persistent downward pressure in recent trading sessions, reflecting a broader shift in market sentiment driven by macroeconomic factors and expectations around monetary policy. The pair continued its slide on Monday, reaching approximately 1.1530 after suffering declines for four consecutive sessions. This recent move highlights the ongoing strength in the US dollar fueled by upbeat economic data and hawkish Fed rhetoric, while the euro continues to face headwinds.
This article unpacks the forces behind the EUR/USD pair’s retreat, examining the economic and policy trends affecting both currencies. It also highlights potential technical levels to watch and offers insight into what might come next for the most widely traded currency pair in the world.
Market Overview and Latest Movement
The EUR/USD currency pair dropped once again on Monday, extending its recent losses and trading near 1.1530. The move followed a fourth consecutive day of declines, reflecting increased demand for the US dollar and a weakening of risk appetite among investors.
Several key drivers are currently putting pressure on the euro and providing tailwinds for the US dollar:
– Stronger-than-expected US labor market data released recently has increased investor expectations that the Federal Reserve will maintain higher interest rates for longer than previously anticipated.
– Robust Non-Farm Payrolls (NFP) data and ISM manufacturing and service metrics have reinforced views that the US economy remains resilient.
– Hawkish commentary from Federal Reserve officials has further bolstered the greenback.
– A cautious tone from the European Central Bank (ECB), with no clear sign of additional rate hikes, has weighed on the euro.
– Risk-off sentiment across global markets has increased demand for the safe-haven appeal of the US dollar.
As of the latest data, the EUR/USD traded close to 1.1530, slightly off intraday lows but still under significant selling pressure.
Macroeconomic Drivers: Dollar Strength Resurfaces
Recent US data has helped reinforce the case for a prolonged period of elevated interest rates. The labor market, consumer spending, and services sector have all exhibited robust performance, suggesting that inflationary risks remain, and the Federal Reserve may need to keep monetary policy tighter for longer.
Important contributing factors to the USD’s recent strength include:
– The US economy added more jobs than expected in October, according to the latest NFP report. The continued resilience of the job market was a key factor in boosting the dollar.
– The unemployment rate held steady, and wage growth remained solid, indicating that labor market conditions are not loosening as fast as expected.
– The ISM Services PMI came in significantly above expectations, painting a picture of strong activity within the US service sector.
– Federal Reserve officials have continued to suggest that inflation remains a concern and that rate cuts are unlikely anytime soon. Notably, Fed Chair Jerome Powell emphasized the importance of ensuring inflation moves sustainably toward the 2 percent target before considering a pivot in monetary policy.
This combination of data and central bank commentary has led to a rise in US Treasury yields, further supporting the greenback and leading investors to scale back bets on near-term rate cuts from the Fed.
Euro Struggles Amid Mismatched Policy Outlook
In contrast to the hawkish tone from the Fed, the European Central Bank has signaled a more cautious stance. While the ECB had previously raised interest rates to combat inflation, recent meetings suggest policymakers are growing concerned about the economic outlook in the eurozone.
Indicators of the eurozone’s economic health present a more fragile picture:
– Inflation in the euro area has slowed, reducing the urgency for further rate hikes.
– Economic growth across member states has struggled, with Germany and other key economies showing signs of stagnation or contraction.
– Manufacturing activity remains in contraction territory, according to PMI surveys.
– Services data has also weakened, suggesting broad-based softness.
– The ECB has hinted that rates may already be sufficiently restrictive to bring inflation down over time.
This divergence in expectations between the Fed and ECB has contributed to the EUR/USD
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