What difference does it make whether the eurozone was in a recession at the turn of 2022 and 2023 or not, if the U.S. labor market continues to signal strength in the U.S.? The decline in the 4-week moving average of unemployment benefits to a 1.5-month low indicates that the American employment situation is all right. And that means that consumer spending is also doing well. If that's the case, then the downturn in the U.S. economy is pushed further into the future—if it happens at all. Did EUR/USD buyers rush with their attack?
U.S. Jobless Claims Dynamics
Another signal of labor market strength raised the probability of a Federal funds rate hike to 5.75% in 2023, above the 30% mark. Before the infamous report on June inflation, the chances were at 36% but then plummeted to 18%. Now investors are thinking differently. The Federal Reserve also believes that drawing conclusions based on a single report is too premature. It is entirely possible that during their meeting on July 25–26, the FOMC will maintain a "hawkish" rhetoric and keep the door open for further interest rate hikes. What will the EUR/USD bulls do then?
For the USD index to continue falling, efforts from all sides are needed. While the U.S. is doing fine, China's recovery is struggling. Investors were expecting a different outcome after lifting all COVID restrictions, but it didn't work out that way. The eurozone was also barely breathing in the first quarter. Yes, the final GDP assessment showed that there was no technical recession. However, zero growth from January to March indicates stagnation. Can the euro strengthen under such conditions?
Eurozone's Economic Dynamics
Certainly, if China becomes a pleasant surprise and the currency bloc finally gets on its feet, positive dynamics in the global economy will support pro-cyclical currencies, including the euro. However, until that happens, the EUR/USD rally looks too fast. Those who understand this are starting to take profits on long positions, which pushed the main currency pair below the 1.12 mark.
In reality, nobody knows what position the Federal Reserve will take. It's difficult to admit mistakes, especially based on a single inflation report for June. Besides, the central bank has the experience of its predecessors at hand. In the 1970s, the Federal Reserve prematurely believed in victory over high prices and was harshly punished for it. Two recessions immediately shook the American economy. Should they step on old rakes again? Or is it better to maintain "hawkish" rhetoric and wait for new inflation statistics? Fed Chairman Jerome Powell and his colleagues will likely choose the latter. This will allow the U.S. dollar to lick some of its wounds.
Technically, on the EUR/USD daily chart, the "bears" were finally able to play out the pin bar. Sales from 1.12 were successful. Now it remains to be seen how long the corrective movement will last. In case of an unsuccessful assault on pivot levels at 1.1145 and 1.112, it makes sense to turn around and take a long position.