04/02/2023
EUR/USD Weekly Forecast – Return to $1.10 Hinged on US Jobs Report
It is a busy week ahead for the EUR/USD. While economic indicators from the euro area will influence, the US Jobs Report will likely have the final say.
Friday saw markets conclude what was a turbulent quarter, albeit an upbeat one for global equities.
The recent banking turmoil shook Q1, though does appear to be receding. Despite the collapse of Silicon Valley Bank and Signature Bank and UBS’s rescue of Credit Suisse, Q1 ended well and truly on the front foot in the equities space. The Nasdaq 100 added an eye-popping 20.0%, Germany’s DAX jumped 12.0%, and Japan’s Nikkei 225 climbed 7.5%. The dollar, however, was a notable victim in March (-2.3% [Dollar Index]) as market participants felt that the recent banking concerns would lead the Fed to pause rate hikes, thus weighing on demand for the buck.
The week ended with a look at the Fed’s preferred measure of inflation—the personal consumption expenditures price index excluding food and energy (for February)—showing that prices rose less than expected at 0.3% (vs 0.4% forecast and a touch lower than January’s 0.5% reading). The YoY measure for February also came in lower than anticipated at 4.6% (vs 4.7% expected). US equity indices gapped higher at the cash open following the release; the S&P 500, in the shape of a near-full-bodied daily bullish candle, added 1.4%, and the Nasdaq 100 cemented its position north of YTD pinnacles to 13,181 (+1.7%).
Market pricing for the upcoming Fed meeting on 3 May shows a 58% probability of another 25bp increase over a 42% chance that the central bank presses the pause button and holds rates steady. Furthermore, current market pricing shows a possible 50bp cut by the year’s end.
Looking ahead as we step into the first full week of April, Monday welcomes the latest US Purchasing Managers Index (PMI) during the early hours of US trading. This release surveys purchasing managers to assess economic health and is a leading indicator. Therefore, this will be a closely watched release this week.
The Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) steal the spotlight heading into mid-week trading. Markets are pricing in a potential pause in rate hikes for the RBA, leaving its Cash Rate at 3.6%; this follows lower-than-expected annual inflation data out of Australia, released late March (cooled to 6.8% from 7.4%, but is still far beyond the central bank’s 2.0% inflation target). However, some desks are still calling for another 25bp push and for rates to peak at 3.85%.
Consequently, early hours on Tuesday will be interesting and may elevate volatility across domestic markets in Australia and the AUD-based currency pairs. Regarding the RBNZ, there is around a 90.0% chance (according to short-term interest rate markets) that the central bank increases its Official Cash Rate by 25bps, bringing the OCR to 5.0%.
Friday will also see the latest US employment situation report, which is expected to reveal an increase of 240,000 new payrolls (versus last month’s stronger-than-expected 311,000 print). Unemployment is expected to remain steady at 3.6%. Importantly, though, the NFP release comes when most major banking institutions close their doors to observe Good Friday. So, the market response could be limited, though bear in mind that with thin liquidity, any reaction could magnify volatility.
The EUR/USD needs to avoid the $1.0838 pivot to target the First Major Resistance Level (R1) at $1.0931. A move through last week’s high of $1.09262 would signal a bullish week. However, economic indicators from Germany would need to impress to support a pre-US Jobs Report breakout.
In case of a breakout week, the EUR would likely test resistance at the Second Major Resistance Level (R2) at $1.1019. The Third Major Resistance Level (R3) sits at $1.1201.
A fall through the pivot would bring the First Major Support Level (S1) at $1.0749 into play. In the case of a data-fueled sell-off, the EUR/USD would likely test support at $1.07 and the Second Major Support Level (S2) at $1.0656.
The Third Major Support Level (S3) sits at $1.0475.
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