US dollar rise risks breaking down on NFPs, catching EUR/USD bears off guard

Will the US dollar regain its momentum ahead?

The US dollar wrapped up a disappointing May as the DXY dollar Index fell about 1.4%, ending a four-month winning streak. Now, with just two days to go this week, the USD is setting up for the best 5-day performance since late April. Is the US dollar readying to resume its broader rally against the Euro, or will EUR/USD find the momentum to push higher in the days ahead?

Over the past few weeks, rising US recession woes have pushed the markets to trim Federal Reserve rate hike expectations for 2023. This is as odds of a 50-basis point rate hike in September dwindled amid increasingly cautious commentary from the Fed. Now, strong US manufacturing data helped reignite hawkish central bank policy expectations as June began.

Meanwhile, St. Louis Fed President James Bullard mentioned that ‘it is too early to say if inflation has peaked’. A combination of the data and Fedspeak overnight helped boost Treasury yields. This is as the expected Fed policy gap narrowed, indicating that the markets see the central bank increasingly closing the difference between benchmark lending rates and inflation in one year.

However, it might be too premature to look at further US dollar strength until this week passes. That is because the highly-anticipated non-farm payrolls (NFPs) report on Friday might disappoint. Looking at the Citi Economic Surprise Index tracking the US in the chart below, data has been increasingly underperforming relative to economists’ expectations as of late.

A softer jobs report could see the markets unwind some of the hawkish expectations priced in over the past couple of days. This could hurt the US dollar and boost risk appetite, perhaps pushing EUR/USD higher. Otherwise, solid or in-line NFPs could see traders shift their focus back on the central bank fighting inflation. With that in mind, what levels should traders be watching ahead?

EUR/USD technical analysis

On the four-hour chart, EUR/USD is starting to show early signs of vulnerability. In late May, the pair broke above a falling trendline from March, opening the door to extending gains. Now, after leaving behind resistance at 1.0787, EUR/USD broke under the 20- and 50-period Simple Moving Averages (SMAs).

This also followed negative RSI divergence, showing that upside momentum was fading. A confirmatory close under support (1.0640) could hint at resuming losses towards the May low (1.0348). Also, a bearish ‘Death Cross’ might soon emerge between the SMAs.

Four-hour chart

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.