The EUR/USD pair ended the trading week at 1.1008, regaining almost all of the positions lost over the past days. The pair made a full circle and returned to the starting point (the opening price of the previous week was 1.1027). Can we say that the downtrend has subsided, having barely started? In my opinion, it is early to draw such conclusions since the upward rebound was mainly triggered by a single report (regarding the US labor market), which certainly has its flaws but is far from being a complete disappointment. Overall, at the end of the week, we can say that the EUR/USD bears failed in their downward attack but have not yet lost the battle: the main battles are still ahead.
It is noteworthy that the major economic reports of the past week did not favor the EUR/USD sellers, but despite that, the pair fell until Thursday (followed by the upward rebound). For example, the eurozone inflation report was released on Monday. The Consumer Price Index fell again, this time to 5.3%, after falling to 5.5% in June. Despite the downtrend, the pace of the CPI's decline noticeably slowed down. However, the highlight of this release is the dynamics of core inflation. The core Consumer Price Index, excluding energy and food prices, remained at 5.5% (for the second consecutive month), against the forecast of a slight decline to 5.4%.
There was another important report for the euro. The eurozone's GDP grew by 0.3% in the second quarter compared to the previous quarter. Compared to the second quarter of 2022, the eurozone economy increased by 0.6%. Preliminary estimates were published on Thursday, but they turned out to be in the "green": most experts expected the indicator to rise by 0.1% in quarterly terms and by 0.4% on an annual basis.
Take note that the European Central Bank, like the Federal Reserve, increased interest rates at the September meeting, "tying" its decision to the dynamics of key indicators, primarily in the field of inflation. Core inflation has long been a headache for the ECB, and judging by the latest report, this problem persists. This is an argument in favor of the euro, as July's inflation has strengthened hawkish sentiment regarding further (potential) ECB actions.
However, US macro data had the opposite effect in the context of possible Fed actions. First of all, the ISM indices were disappointing, especially in the manufacturing sector. Instead of the expected decline to 47.0, the indicator rose only to 46.4 points, once again falling into the "red". The index has been below the key 50-point level for nine (!) consecutive months. The ISM Business Activity Index in the services sector also entered the red, reaching 52.7 compared to forecasts of 53.5 points.
The question arises: why did the dollar strengthen its positions almost throughout the week despite the fundamental picture described above? In my opinion, the greenback moved on the momentum of the previous week when unexpectedly strong data on US economic growth in the second quarter (2.4% growth instead of the expected 2.0% growth) were announced. In addition, there was overall risk-off sentiment in the markets after the international rating agency Fitch downgraded the US government's credit rating to AA+ (from the highest AAA). The downgrade was caused by "expected fiscal deterioration," a growing debt burden and "the erosion of governance," Fitch Ratings said. The dollar benefited from the current situation, albeit temporarily, until the White House criticized Fitch's decision (according to Treasury Secretary Janet Yellen, Fitch's assessment is based on outdated data).
The greenback also benefited from the ADP report, which came in the "green," almost doubling the forecast estimates. According to preliminary forecasts, the number of private-sector jobs increased by 180,000 in July. However, according to ADP experts, the number of jobs created in this sector grew by 324,000. This result led to the assumption that Friday's Nonfarm Payrolls would also be in the "green."
But these expectations were not met. In fact, this undermined the US currency towards the end of the trading week: the US Dollar Index lost almost all of its gains in a matter of hours. Traders took the weak job growth numbers hard. Instead of the expected growth of 205,000, the number of non-farm jobs increased by only 187,000. This component of the report has fallen below the 200,000 mark for the second consecutive month (the June figure was revised lower to 185,000). In the private sector, the number of employed increased by 172,000, with a forecasted growth of 190,000.
Although all other components of the report were in the "green," the dollar came under a sell-off, weakening its positions across the market. In particular, the EUR/USD pair jumped to 1.1043, but then the upward momentum began to wane (recall that Friday's trading ended at 1.1008). This indicates that the pair rose more on emotions and on relatively shaky fundamental grounds.
Thus, the final score for the week is 1:1. The conflicting Nonfarm Payrolls weakened the dollar, even though the inflationary component of the report (wages) was better than expected. On the other hand, the euro received support from the inflation report (core CPI was again in the "green"), but the pair only shot up because the US Dollar Index fell.
In other words, EUR/USD traders still cannot determine the price direction in the medium term. The bears have failed to settle below the support level of 1.0950 (the middle line of the Bollinger Bands on the four-hour chart), while the buyers have been unable to break above the 1.1030 target (the upper line of the Bollinger Bands on the same time frame). All of this indicates that the price range of 1.0950-1.1030 is still relevant. It is likely that the pair will continue trading within this range (+/- a few tens of pips) until next Thursday (August 10) when the US CPI report will be published. This release could trigger strong volatility in the EUR/USD pair, either strengthening or weakening the positions of the US dollar.