Euro rebounds after sharp losses, NFP next

The euro is in positive territory today after taking a nasty spill on Thursday. In the European session, EUR/USD is trading at 0.9984, up 0.40%.

Euro slides as risk appetite slides

Thursday was a day to file away and move on for the euro, as EUR/USD tumbled 1.07%. The euro is under pressure from a high-flying US dollar and is having trouble staying above the symbolic parity line. A combination of solid US numbers, weak eurozone data and lower risk sentiment sent the euro sharply lower.

German Manufacturing PMI dipped to 49.1, down from 49.3 in July. This marked a second straight contraction, and was the lowest level since May 2020, at the start of the Covid pandemic. It was a similar story for the eurozone Manufacturing PMI, which dropped from 49.8 to 49.6, a 26-month low. The manufacturing sector continues to struggle with supply chain disruptions and a shortage of workers, and high inflation and an uncertain economic outlook are only exacerbating matters.

In the US, the ISM Manufacturing PMI held steady at 52.8, showing modest expansion. The labour market remains strong, with initial jobless claims dropping to 232 thousand, down from 237 thousand a week earlier and much better than the consensus of 248 thousand.

Adding to the euro’s woes is the uncertainty over European energy supplies from Russia. Russia has shut down Nord Stream 1 pipeline for three days for maintenance, but Germany has charged that the shutdown is politically motivated and that the pipeline is “fully operational”. Nord Stream is supposed to come back online on Saturday. Even if Moscow does restore service, this episode is a reminder of Europe’s energy dependence on an unreliable Russia. Germany has greatly reduced its dependence on Russian gas, from 55% in February to just 26%, but a cutoff from Moscow would result in a shortage this winter.

The week wraps up with the August nonfarm payrolls report. The consensus is for a strong gain of 300 thousand, after the unexpected massive gain of 528 thousand in July. The report could well be a market-mover for the US dollar. The markets are finally listening to the Fed’s hawkish message, and a strong reading will raise expectations of a 0.75% hike in September and likely push the dollar higher. Conversely, a weak report would complicate the Fed’s plans and raise the likelihood of a 0.50% hike, which could result in the dollar losing ground after the NFP release.

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EUR/USD Technical

• EUR/USD is testing resistance at 0.9985. Above, there is resistance at 1.0068
• There is support at 0.9880 and 0.9797

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