EUR/USD: Will the Recovery Continue Amid Major Economic Data Impact?
By Rania Gule Market Analyst at XS.com
The EUR/USD pair recorded gains for the sixth consecutive day in early Friday trading, currently trading near 1.0820. As major economic data approaches, European retail sales and US non-farm payroll data are expected to cause significant market volatility. US markets resume activity after the Independence Day holiday, with market activity expected to increase notably.
Yesterday, German factory orders declined by -1.6% month-over-month in May, compared to the previous -0.2%, failing to meet the expected increase of 0.5%. Weakness in the US dollar supported the pair’s rise just above 1.0800.
Retail sales data for the EU are expected to show a monthly increase of 0.2% in May, rebounding from the previous -0.5% contraction. US non-farm payrolls are anticipated to decrease to 190,000 jobs in June from 272,000 in the previous month, with the unemployment rate expected to remain unchanged at 4.0% and average hourly earnings slowing slightly to 3.9% every year, down from 4.1% previously. These factors may lead to significant short-term market fluctuations.
The EUR/USD pair rose to around 1.0800 ahead of the second round of legislative elections in France, the second-largest economy in the Eurozone, scheduled for Sunday. Following the victory of the far-right National Rally party led by Marine Le Pen, a tactical withdrawal by President Emmanuel Macron’s centrist coalition and the left wing is expected in at least 200 parliamentary candidate withdrawals in an attempt to thwart the far-right from achieving an absolute majority. This could lead to an extremely unstable coalition, potentially driving French government bond yields to record highs.
In my view, attempts to prevent the far-right from winning a majority in the legislative elections have mitigated the euro’s decline. Investors fear that forming a new government could strengthen expansive fiscal policies, exacerbating the existing financial crisis in France.
Regarding monetary policy, recent inflation figures in the Eurozone suggest that deflation remains on track towards the ECB’s 2% target, giving the bank greater room to cut interest rates more rapidly. However, investors are more concerned, in my opinion, about whether the ECB will extend interest rate cuts at its upcoming meeting scheduled for July 18.
The initial inflation report for the Eurozone in June showed that the annual consumer price index fell as expected to 2.5%, while the core consumer price index, excluding volatile items, continued to grow steadily at 2.9%.
From my perspective, the entire growth in the Eurozone can be attributed to the services sector. While manufacturing weakened significantly in June, service sector activity continued almost as strongly as the previous month. Looking at the contrasting indicators from the preliminary Purchasing Managers’ Index, service providers are likely to remain the decisive force sustaining positive economic growth in the region for the remainder of this year.
