Written by: Rania Gule, Senior Market Analyst at XS.com
The EUR/USD pair saw some pullback on Friday after notable gains yesterday. It traded at 1.05740 after rising about 0.7% to reach 1.0600, reflecting a relative improvement of the euro against the U.S. dollar. I believe this rise comes at a critical time, as the market reacts to a combination of economic factors affecting the European Central Bank’s (ECB) monetary decisions and market expectations regarding the U.S. economy.
Among these factors, European retail sales in October fell short of expectations, despite surpassing the average forecast. Retail sales grew by 1.9% compared to last year, which is an improvement over the expected 1.7%. However, this growth is significantly lower compared to the 3% increase recorded in the previous month, reflecting a slowdown in economic activity in the region.
It is widely expected that the ECB will reduce interest rates by a quarter percentage point at its next meeting next week, adding to a series of measures it has taken earlier to lower borrowing costs and boost economic growth in the region. In my opinion, despite the rise in inflation in some European sectors, the decline in retail sales growth has likely pressured ECB officials to accelerate monetary stimulus.
ECB President Christine Lagarde’s statements reflect this direction, as she reaffirmed the bank’s commitment to reducing interest rates in the short term to support growth, despite emphasizing that inflation will decline in 2025. I believe that this move towards rate cuts strengthens the negative outlook for the euro in the short term, but at the same time, it provides room for risk-taking in financial markets, as investors believe that monetary easing could enhance the attractiveness of European markets.
On the U.S. side, economic data still shows mixed effects on the economy’s outlook. In November, initial jobless claims rose to their highest level in six weeks, with 224,000 claims, exceeding the expected 215,000. There was also a noticeable increase in job cuts during the same month, reflecting continued pressure on the U.S. labour market. In my view, although this data suggests some weakness in the U.S. labour market, the much-anticipated non-farm payrolls report on Friday is drawing significant attention from investors, especially after Jerome Powell’s speech.
The market expects the report to show a net addition of around 200,000 jobs in November, following a sharp decline in October, which was partly due to layoffs caused by hurricanes and strikes. In my opinion, this report will be crucial in determining the future path of U.S. monetary policy and expectations regarding interest rate hikes or cuts by the Federal Reserve.
Thus, the euro remains vulnerable to significant fluctuations due to the monetary policies in Europe and the divergent economic expectations. On one hand, the eurozone still faces economic challenges, including slower growth in some key sectors, while the ECB seeks to stimulate economic activity by cutting interest rates. On the other hand, the U.S. remains at the centre of global economic discussions, with markets awaiting the non-farm payrolls report to determine future directions for the Federal Reserve.
I see the EUR/USD pair at a sensitive juncture, as investors await clear signals from both the European Central Bank and the U.S. Federal Reserve regarding the sustainability of monetary easing policies in both regions.
Ultimately, the economic factors in both Europe and the U.S. are intricately interwoven, making short-term predictions for the EUR/USD movement challenging. While a rate cut in Europe may initially hurt the euro, at the same time, the dollar may remain under pressure if signs of weakness in the U.S. labour market emerge, potentially creating a relative balance in the pair’s movement. Therefore, the movement of EUR/USD soon will largely depend on the interaction of upcoming economic data from both sides, especially the U.S. non-farm payrolls report today.