EUR/USD -Euro shrugs off weak eurozone, German data

• Eurozone, German data disappoint
• ECB raises rates by 25 bp
• US nonfarm payrolls expected to decline

EUR/USD is drifting on Friday. In the European session, EUR/USD is trading at 1.1028, up 0.13% on the day.

Today’s eurozone and German data were a disappointment. Eurozone retail sales for April declined 1.2% m/m, following a downwardly revised -0.2% in March and below the consensus of 0.0%. German Factory Orders for March plunged 10.7% m/m, versus a downwardly revised 4.5% in February and a consensus of -2.2%. The weak numbers were a reminder of weakness in the German and eurozone economies, but the euro shrugged off the data. Investors are preoccupied with digesting the ECB’s modest rate hike of 25 basis points and are waiting for the US nonfarm payrolls release later today.

ECB raises rates, keeps door open to further increases

The ECB mimicked the Federal Reserve and raised rates by 25 bp on Thursday. This marked a seventh straight rate increase from the ECB, but it was the smallest hike in the current tightening cycle. The ECB is trying to chart a rate path amidst weak growth and stubbornly high inflation and had to choose between hikes of 25 or 50 basis points. In the end, the central bank opted for the smaller increase, but ECB President Lagarde had a clear message that the Bank was not pausing and rates were not yet “sufficiently restrictive” to bring inflation down to the 2% target.

EUR/USD fell by 0.55% on Thursday despite Lagarde’s hawkish message, possibly on disappointment that the rate hike was not 50 basis points. Inflation has been moving lower but upside risks remain, and that means that there is a good chance that the ECB will raise rates at least once or twice more. The markets have priced in a terminal rate of 3.65%, indicating that one more 25-bp hike is fully priced in but a second hike is less certain.

The US wraps up the week with nonfarm payrolls for April. The estimate stands at just 179,000, following 236,000 in March. The strong labour market, which has withstood the Fed’s tightening remarkably well, appears to be showing cracks. Unemployment claims jumped to 242,000 last week, up from a downwardly revised 229,000 and above the consensus of 240,000. Business optimism remains weak and that could translate into less hiring. If NFP falls to 180,000 or lower, the US dollar could lose ground on expectations that the Fed will ease its rate policy.

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EUR/USD Technical

• EUR/USD is testing resistance at 1.1022. The next resistance line is 1.1146
• 1.0956 and 1.0839 are providing support

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