EUR/USD Pares NFP- Inspired Losses, Retreats Back Above 1.06900s Amid Modest U.S. Dollar Weakness

•  EUR/USD cross retreats above 1.06900s amid modest U.S. dollar weakness
• Uncertainty over the next Fed policy move undermines the greenback and helps limit further EUR/USD losses
• The Euro continues to be undermined by Dovish ECB market expectations plus incoming weak Eurozone PMI data

During the mid-Asian Session on Monday, the EUR/USD pair attracted some dip buying from the vicinity of the 1.06933 level. The cross rebounded swiftly from the daily low to stage an intraday recovery and, at the time of speaking, has managed to recover part of its early losses. The shared currency looks set to maintain its offered tone heading into the European session amid modest U.S. dollar weakness. Uncertainty of whether the Fed would hike interest rates in June was a key factor that triggered some short selling around the U.S. dollar at high levels and, in turn, helped limit further EUR/USD losses. The risk-on impulse and a softer tone around the U.S. equity markets also acted as a headwind to the greenback.

The downside, however, seems limited as the U.S. dollar is still supported by high U.S. treasury bond yields, which suggests the current price action runs chances of fizzling out sooner or later, and the path of least resistance for the EUR/USD pair is to the upside. A U.S. Bureau of Labor Statistics report on Friday showed job numbers smashed expectations, pointing to a robust U.S. labor market and cementing market expectations that the Fed still needs to be done hiking interest rates.

The U.S. economy unexpectedly added 339K jobs in May 2023 in the public and private sectors, the most in four months and way above market forecasts of 190K. Figures for March and April were revised, bringing employment 93K higher than previously reported. On the other hand, the unemployment rate rose to 3.7% in May, the highest since October 2022 and above market expectations of 3.5%. Furthermore, as expected, average hourly earnings rose by 11 cents, or 0.3%, to $33.44 in May 2023, after a downwardly revised 0.4% increase in the prior month. Over the past 12 months, average hourly earnings have increased by 4.3% in May, in line with market forecasts, after a 4.4% increase in the prior month.

The upbeat job numbers combined with stronger-than-expected US PCE figures released in early May have somewhat reinforced a hawkish Fed outlook in June. Markets have been pricing a higher chance of a 25bps interest rate hike in the next Fed meeting for the better part of last month. However, the odds were slashed late last week after an influential FOMC member backed the case for skipping hiking interest rates in June. This might hold back investors from placing aggressive bearish bets around the safe-haven buck and benefit the euro currency. Apart from this, the hawkish comments by several ECB officials last week backing the case for further rate hikes support the case for some dip-buying around the euro currency. On Thursday, ECB president Christine Lagarde said, "We need to continue our hiking cycle until we are sufficiently confident that inflation is on track to return to our target in a timely manner".

Lagarde's comments came after a Eurostat report showed the consumer price inflation rate in the Euro Area fell to 6.1% in May 2023, down from 7.0% in the previous month and below market expectations of 6.3%, a preliminary estimate last week showed. Furthermore, the core inflation rate, which excludes energy, food, alcohol, and tobacco, also eased more than anticipated, reaching 5.3%. Despite Lagarade's comments, markets are still pricing an ECB pivot at the next monetary policy meeting. That said, the difference in monetary policy adoption between the ECB and the FED is set to act as a headwind for the Euro in the long run. 

Additionally, later, incoming European data is expected to show a slightly wider German trade deficit combined with downbeat Eurozone PMI data. Conversely, incoming data from the U.S. docket is expected to display upbeat U.S. PMI data, suggesting the path of least resistance for the EUR/USD pair is to the downside.

Technical Outlook: Four-Hours EUR/USD Price Chart

From a technical standpoint, a further increase in buying pressure from the current price level would uplift the EUR/USD pair toward retesting the key resistance level plotted by a descending trendline extending from the early-May 2023 swing high. A breach above this resistance level would pave the way for a further upside move toward tagging the 20 (blue) and 50 (red) days Exponential Moving Averages (EMA) at 1.07201 and 1.07373 levels, respectively. If the price finds acceptance above these EMA levels, the price could ascend to confront the 50% and 61.8% Fibonacci retracement levels at 1.07349 and 1.07455 levels, respectively. Sustained strength above this barricade, followed by a breach above the 1.07573 resistance level, would provoke an extended rally toward confronting the technically 200-day solid (yellow) EMA at the 1.08293 level. A convincing move above this level could negate any near-term bearish outlook and pave the way for further gains around the EUR/USD pair.

On the flip side, if sellers resurface and spark a bearish turnaround, the price will first find support at the 1.06347 level. A decisive flip of this support level into a resistance level could see the EUR/USD cross accelerate its decline toward retesting the trendline support. A Break below this level would pave the way for further sell-side moves around the EUR/USD pair.