The EUR/USD exchange rate rose for the second day straight even as it became clear that the European Central Bank (ECB) and the Federal Reserve will diverge this year. The pair rose to a high of 1.0725 ahead of Friday’s nonfarm payrolls data.
Fed and ECB will divergeThere are signs that the Feed and the ECB will diverge this year. In a statement on Wednesday, the Fed noted that the American economy was still strong because of strong consumer spending. It also remained muted on when it will start to cut interest rates.
Economists have mixed opinions on when the rate cuts will start. Some of them believe that the cuts will start later this year while others expect them to come in 2024 since inflation remains stubbornly high.
The headline Consumer Price Index (CPI) rose to 3.5% in March while the Personal Consumption Expenditure (PCE) rose to 2.5%. These numbers mean that inflation has stopped falling and that it could take longer before reaching the Fed’s 2% target.
Some analysts believe that the Fed’s posture is wrong since the economy is showing some signs of strains. For example, while consumer spending is continuing, it has been powered by borrowing. The most recent data shows that credit card debt has risen to $1.7 trillion. Household debt has risen to $17.5 trillion while default rates are rising.
At the same time, some economic numbers are pointing to weakness in the economy. Manufacturing PMI fell to below 50 in April while consumer confidence has dropped sharply. Other numbers like retail sales and industrial production have not been doing well.
Friday’s nonfarm payroll numbers are set to show that the economy created over 248k jobs. However, a closer look will likely show that most of these were part-time jobs. Over 8 million Americans are holding at least two jobs.
Elsewhere, the European Central Bank (ECB) is committed to start cutting interest rates in June. Europe’s inflation has dropped to 2.4% and lower energy costs will likely push it to the 2% target soon. The bloc’s manufacturing activity is also contracting while most consumers are struggling.
Therefore, in the near term, there is a possibility that the carry trade opportunity will lead to a stronger US dollar and a weaker euro.
EUR/USD technical analysis
The EUR to USD pair has held steady in the past two days partly because of the moderately dovish Federal Reserve. It has remained steady above the key support level at 1.0700. The pair has also formed a small ascending channel, which has a resemblance to a bearish flag pattern.
The EURUSD pair has moved below the 50-day moving average. It has moved slightly above the key support at 1.0697, its lowest swing on February 14th. Therefore, the outlook for the pair is bearish as the focus shift to Friday’s job numbers.
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