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EUR/USD Shows Strength as USD Weakens Ahead of US Nonfarm Pay...

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EUR/USD Shows Strength as USD Weakens Ahead of US Nonfarm Payrolls

The Euro (EUR) is demonstrating resilience against the US Dollar (USD), pushing EUR/USD to multi-day highs near 1.0550. Simultaneously, the USD is losing ground, revisiting 106.30 on the USD Index (DXY). This dynamic reflects improved sentiment in the risk-associated universe, despite only a tepid rebound in US yields. While the US Federal Reserve (Fed) is expected to keep interest rates unchanged in the near term, questions surround the European Central Bank (ECB) as inflation surpasses targets and concerns about recession or stagflation linger in the Eurozone.

Economic Indicators

In terms of recent economic indicators, Germany's Factory Orders expanded by 3.9% in August, while Italy's Retail Sales contracted by 0.4% during the same month.

US Nonfarm Payrolls Preview

All eyes are currently on the release of September's Nonfarm Payrolls and Unemployment Rate data from the United States. Economists expect job creation to remain steady, with Nonfarm Payrolls set to rise by 170,000, a slight dip from the 187,000 reported in August. The Unemployment Rate is also anticipated to drop modestly to 3.7% in September.

The Hawkish Fed and US Dollar's Rally

The Fed's hawkish stance and the strong US job market have led to expectations of a final interest-rate hike by the Fed this quarter. This sentiment was reinforced when US job openings unexpectedly rose to 9.610 million in August, indicating a persistently tight labor market that allows the Fed room for further tightening.

This outlook propelled the US Dollar Index to an 11-month peak above 107.00, with US Treasury bond yields approaching 16-year highs.

Changing Sentiment

However, the odds of a Fed rate hike in November dipped to 23% from about 31% following downbeat US labor market data released on Wednesday. The Automatic Data Processing (ADP) report showed that the US private sector added only 89,000 jobs in September, significantly below expectations.

US Institute for Supply Management (ISM) Services PMI also fell from 54.5 to 53.6 in September, although it matched expectations. These developments triggered a correction in the US Dollar and bond yields.

Anticipating the Impact on EUR/USD

Friday's Nonfarm Payrolls data will provide critical insights into the labor market's tightness, especially after a robust JOLTS report and softer private payrolls data. A positive NFP print and strong wage inflation data could strengthen expectations for another Fed rate hike by year-end, potentially driving EUR/USD below 1.0400.

Conversely, if the data suggests weakening labor market conditions and deters hopes of further Fed rate hikes in 2023, EUR/USD could stage a robust recovery toward 1.0650.

Conclusion

The EUR/USD pair is showcasing strength as the USD weakens in anticipation of the US Nonfarm Payrolls data. While the market closely watches the economic indicators, the interplay between the Fed and ECB policies continues to shape the currency landscape. A lot hangs on the NFP report's outcome, and it could sway EUR/USD in either direction as investors weigh the implications for future monetary policy actions.

On the EUR/USD daily timeframe, we can see the "Big picture"