The US dollar came under renewed pressure after Jobless Claims jumped, which further improved the short-term EUR/USD outlook. But clearly, investors are not in a hurry to bet the farm on any major FX trends, with big events taking placing in the week ahead. These include the US CPI on Tuesday, which could be the deciding factor between the Fed hiking or not at the next day’s FOMC meeting. We also have rate decisions from the ECB and BoJ at the back end of the week, to look forward to.
EUR/USD outlook: Key levels to watch
Before discussing the macro factors in greater details, let’s take a quick look at the chart of the EUR/USD. The ley support is around 1.0700, which has been defended again as can be seen on this 4-hour chart:
The EUR/USD outlook improved at least on a technical basis after prices broke through the bearish trend line. However, subsequent price action since that break of the trend has not been significantly bullish as prices have remained near their recent low. This is obviously because many investors are just sitting on their hands until next week’s key events.
Still, we can’t ignore these bullish signs, so be careful if you are still uber-bullish on the dollar or bearish the EUR/USD.
Jobless claims jump
At the time of writing on Thursday, the US dollar was again coming under pressure after the weekly jobless claims data showed a much larger rise than expected, fuelling speculation that the labour market is finally starting to respond to the impact of past rate hikes and spike in inflation.
Initial claims came in at 261K vs. 235K expected and 233K in the previous week. This was obviously a big surprise and the highest since October 2021, but continuing claims fell (the latter is on a week lag).
As a reminder, Friday’s jobs report showed a very contrasting picture of the economy with the household survey pointing to job losses while the headline nonfarm payrolls pointing to another big rise in employment. Judging by the jump in jobless claims, it looks like the jobs market is not as strong as the headline NFP print would suggest.
Ultimately, though, it is what the Fed thinks and so I wouldn’t be surprised if the dollar remained within its recent tight range heading into the big week.
AUD, CAD and TRY among large movers this week
This week’s price action has been largely contained when you look across the major FX pairs, gold and indices, although some big moves have been observed in some emerging market currencies (not least the Turkish lira). Among the majors, the AUD and CAD were the exceptions, though, as both rallied after the RBA and BOC surprised with their interest rate hikes.
In fact, it was these rate decisions that rekindled concerns that global central banks, including the Fed, are probably not as close to their terminal rates as expected. Yields rose across the board, which reduced the appeal of gold, and kept the dollar near recent highs as the odds of an additional Fed rate hike this summer rose slightly.
Watch crude oil prices
Meanwhile, it is worth watching crude oil prices, which fell and then bounced back as investors weighed a weaker demand outlook against reduced OPEC+ supplies.
Inflation concerns and therefore further policy tightening fears could intensify should oil prices push higher again. Crude prices have stabilised with traders now thinking twice about shorting oil, after Saudi Arabia took the matters into its own hands. After threatening short sellers will be ‘ouching’ last month, Saudi followed through on its warning by voluntarily cutting its oil output by a million barrels a day from July. The rest of the OPEC+ members agreed to extend their previously agreed cuts through to the end of 2024. The OPEC wants higher oil prices (obviously) and may be able to achieve that should demand remains strong enough in the coming months.
-- Written by Fawad Razaqzada, Market Analyst