EUR/USD recovers to around 1.0700, though capped by 50DMA for now pre-Friday’s NFP

• EUR/USD is trading higher by about 0.5% on Thursday as US yields ease amid mixed US jobs data pre-Friday’s NFP.
• The pair has rebounded back to around 1.0700, though remains capped under its 50DMA.
• Buck bulls may come back if Friday’s US jobs data reveals hotter than expected wage growth.

EUR/USD rebounded on Thursday, though was unable to break back above the 1.0700 level or its 50-Day Moving Average just above it at 1.0723 and has since pulled back to change hands just below 1.0700. The pair is nonetheless still trading with on-the-day gains of about 0.5%, as the US dollar eases across the board amid a pullback from earlier weekly highs in US yields.

The buck had been given a boost on Wednesday following stronger than expected US ISM Manufacturing PMI numbers for May, whilst a barrage of employment data on Thursday (Q1 Unit Labour Cost, May ADP Employment Change and weekly jobless claims) failed to spur a similar reaction. That perhaps isn’t too surprising given the upcoming release of the official US labour market report for May on Friday, which is deterring currency market participants from placing any big dollar bets based on labour market considerations for now.

EUR/USD is now back to trading with only very slight losses on the week, with the pair also still deriving support from hot Eurozone inflation figures that showed price pressures reaching record highs last month. The latest inflation data means that a 50 bps rate hike from the ECB at its July meeting is on the table, with some even going so far as to bet that the ECB might break from its recent guidance and lift interest rates even sooner than the July meeting (i.e. this month?).

Hot Eurozone inflation, a hawkish ECB plus a growing sense since April US Consumer Price Inflation (CPI) and Core PCE data was released last month that US inflation might have now peaked, reducing the pressure on the Fed to tighten so aggressively in H2 2022 and 2023, have been key factors supporting EUR/USD in recent weeks. As of Thursday, the pair is trading nearly 3.5% higher versus mid-May lows in the mid-1.0300s.

But there is a risk that Friday’s US jobs report rekindles some USD strength, if it shows US wage growth picking up once again. Labour market developments that raise the risks of high US inflation becoming embedded (such as rapid wage growth) will encourage the Fed to remove their foot from the monetary accelerator and onto the break at a faster pace. In this scenario, the EUR/USD bears will be eyeing a drop back towards the 21DMA around 1.0600.