The major non-commodity pair EUR/USD saw one of the sharpest Friday moves, falling back below the perceived psychological line of 1.1400. During the second half of the trading day, the pair experienced a longer-term drop. It lost 0.55% and closed at 1.1382. Taken together, the movement reflects a developing bearish sentiment in the market. In fact, investors are reacting furiously to every new piece of economic data that comes out of the United States.
As such, the EUR/USD pair is one of the most widely traded currency pairs on Earth. It accounts for more than 30% of all foreign exchange trades. Its importance is magnified as it depicts the Euro, the currency used by 19 countries that make up the Eurozone. Moreover, it represents the US Dollar, the most important and traded currency of the world.
Economic Data Influences Market Sentiment
In addition to news related to targets and deals, the release of the US Nonfarm Payrolls (NFP) report shifted market dynamics heavily. In May, US job growth exploded with the addition of 139,000 new jobs. At the same time, the unemployment rate remained unchanged at 4.2%. Such figures would indicate a fairly stable labor market, lending support to a more confident US consumer.
In keeping with this news, the CME Group FedWatch Tool reflected a decrease in the expected probability of a 25 bps (basis points) rate cut by July. The chance fell by nearly a third—from about 30% to well under 20%. Market participants interpreted this as a sign that the Federal Reserve would be inclined to maintain its status quo monetary policy. This belief only served to prop up the US Dollar against the Euro.
Wall Street’s primary indexes opened higher after the jobs report, a sign of growing confidence in the US economic recovery. Investors rejoiced, which then rippled through and moved trading behavior across nearly every asset class and financial market.
Implications for the Euro and Eurozone Economies
The Eurozone/euro area includes 19 of the 27 EU member countries. As you can see, economic data from its four largest economies—Germany, France, Italy and Spain—heavily influences market perceptions. Combined, those countries represent about 75% of the Eurozone’s economy.
Relatively high interest rates compared to other currencies usually play in favor of the Euro. Yet, prevailing market conditions have added a bearish push to EUR/USD. The current shift of geopolitical crises and fears of continued inflation in Europe add a further burden for the Euro’s prospects against the US Dollar.
Traders and analysts alike will be looking very critically at these next economic indicators from the major Eurozone countries. These indicators have the potential to significantly change the EUR/USD outlook going forward. As you might expect, any perception of economic strength or weakness would trigger opposite impacts on investor perceptions and currency values.
The Future of EUR/USD
EUR/USD, meanwhile, is trading back below the psychological 1.1400 mark and under renewed bearish pressure. Market participants are broadly remaining on guard for new, bullish catalysts that might turn the tide. The pair’s performance will likely hinge on forthcoming economic reports and central bank communications from both the European Central Bank (ECB) and the Federal Reserve.
Traders though, are confronted with a fast-changing, high-stakes, competitive trading landscape. As they respond to foreshadowing of shifts in interest rates and macroeconomic factors, spikes are bound to unfold. In fact, EUR/USD accounts for almost a quarter of all global currency transactions. Consequently, its ups and downs will continue to mesmerize investors globally.