Dramatic Swings in EUR/USD Amidst Eurozone Inflation and US Labor Data

Dramatic Swings in EUR/USD Amidst Eurozone Inflation and US Labor Data

The EUR/USD experienced a turbulent day of trading on Friday, fueled by the release of Eurozone inflation data and US labor data. European inflation figures for December surprised the market, with the Eurozone Harmonized Index of Consumer Prices (HICP) rising to 2.9% year-on-year (YoY), surpassing the forecasted 2.4% and November’s 2.4% reading. Despite expectations for a 3.0% print, any increase in inflation reduces the likelihood of the European Central Bank (ECB) implementing interest rate cuts to stimulate borrowing and lending. The higher-than-expected inflation figures pushed the EUR/USD to a three-week low.

However, the EUR/USD quickly rebounded as US Nonfarm Payrolls (NFP) handily beat market expectations. The December NFP report showed the addition of 216,000 new jobs to the US labor market, surpassing the forecasted 170,000. Furthermore, US Average Hourly Earnings climbed to 4.1% YoY, beating the expected decrease to 3.9% and overtaking November’s 4.0% reading. The strong labor market data delivered a blow to market expectations of rate cuts, reducing the possibility of the Federal Reserve (Fed) rushing to implement such measures. Consequently, money markets, which initially priced in a 90% chance of a rate cut during the Fed’s March meeting, revised their odds to around 60%.

Although the labor market beat expectations, the US ISM Services Purchasing Managers’ Index (PMI) for December surprised to the downside, printing at 50.6 instead of the forecasted 52.6. This marked a decline from November’s 52.7 and reached a seven-month low. Additionally, revisions to official labor figures further complicated the economic outlook. The November NFP was revised significantly lower from 199,000 to 173,000, and October’s NFP print saw a downward revision to 105,000 from 150,000. These data revisions undermine the credibility and accuracy of labor market data, creating uncertainty among investors.

Next week, market participants will closely monitor the release of European Retail Sales data, as well as various confidence and sentiment readings across different sectors. On the US front, data releases are relatively thin until Thursday’s US Consumer Price Index (CPI), where the headline annualized US CPI is expected to increase from 3.1% to 3.2%. These upcoming releases will provide further insight into the state of the Eurozone and US economies.

Despite Friday’s brief rally, the EUR/USD remains unable to breach the 200-hour Simple Moving Average (SMA) located just above the key 1.1000 level. Currently, the pair is consolidating within the range defined by the 200-hour SMA and the 50-hour SMA around 1.0940. Throughout the latter part of the week, the EUR/USD has meandered around median prices. Notably, an early decline on Monday from the 1.1040 region weakened the EUR/USD before entering a relatively flat trading period leading up to Wednesday. Furthermore, 1.0900 represents a technical barrier hindering further downside movement. Daily candlestick patterns show the EUR/USD consolidating slightly above the bullish crossover of the 50-day and 200-day SMAs, which are located near 1.0850. Traders will be watching closely for a confirmation of this technical confluence to propel the pair towards retesting December’s peak around 1.1140.

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