EUR/USD Encounters Pressure as Recovery Stalls; USD Strengthens Amid Anticipated Fed Hawkishness

The EUR/USD pair starts the new week on a weak note, retreating further from a four-day high around 1.1040 reached following the uninspiring US Non-Farm Payroll (NFP) data last Friday. During the Asian session, spot prices slipped beneath the significant 1.1000 mark, putting a halt to a two-day recovery from a nearly one-month low, which was around the 1.0910 level coinciding with the 100-day Simple Moving Average (SMA).

The US Dollar (USD) receives a boost from investors anticipating the Federal Reserve (Fed) to maintain its hawkish policy, thereby creating pressure on the EUR/USD pair. US monthly employment details showed that only 187K jobs were added in July, and with downward revisions for May and June data, it hinted at a slowing demand for labor. However, strong wage growth and an unexpected decrease in the unemployment rate continue to point towards labor market tightness. This leaves the window open for another 25 bps rate hike by the Fed in either September or November, providing some support to the dollar.

Conversely, the shared currency is weakened by projections that the European Central Bank (ECB) will end its run of nine consecutive interest rate increases in September, given signs that core inflation in the Euro Zone has topped. Indeed, Fitch Ratings indicated on Friday that decreasing Euro Zone inflation puts the peak of ECB rates within sight. Furthermore, the ECB, in its Friday economic bulletin, highlighted that the Euro Zone’s core inflation likely peaked in the first half of 2023. This is seen as another factor adding to the bearish tone surrounding the EUR/USD pair. However, bearish investors may hold off on aggressive moves before the release of US inflation data this week.

The pivotal US CPI report due this Thursday will significantly sway market predictions regarding the Fed’s forthcoming rate hike trajectory and the USD demand. In the meantime, Monday’s trading cues will come from the Euro Zone macro data, including German Industrial Production and Sentix Investor Confidence. With no significant US economic data due for release, the USD will be influenced by speeches from various FOMC members.

Any policy-related comments could stimulate the dollar and present traders with short-term opportunities around the EUR/USD pair. However, the existing fundamental scenario implies that the path of least resistance for spot prices lies downward.