EURUSD Under Pressure Ahead of NFP

Markets expect the crucial US labour indicator to maintain its strength, keeping the Fed on a more hawkish path and weighing on fibre.

Momentum Shifts Lower

EURUSD kicked off 2025 with an upward trend but has shifted lower since inflation readings started to surface. Flash CPI in the eurozone accelerated as projected by economists and the ECB due to rising energy costs. However, forecasts point to inflation reversing course through early 2025, suggesting future rate cuts remain on the table. While markets price in four rate cuts in 2025, investor confidence in the ECB holding rates in January has strengthened on the back of the hotter inflation prints. The market also appears to price in a Fed hold in January with a 95% probability, suggesting sideways price action in EURUSD on stable interest rate differentials. Barring any major surprises from upcoming data releases, the euro may stay above parity.

Meanwhile, the US economy continues to show signs of strength, with activity levels pointing to upward pressure on inflation. PMIs in December revealed a solid services sector, with rising demand supporting employment. While economists expect jobs to moderate from November's surprisingly strong number, forecasts suggest they will stay relatively high, suggesting a consolidated labour market that reduces pressure on the Fed to ease policy.

Market Focus Points

Consensus estimates project 154K US jobs added in December, down from the 227K reported previously but above the trailing six-month average. The unemployment rate is forecast to hold steady at 4.2%, maintaining the sideways trend that largely stabilised through H2. Investors are watching for signs that the jobs market is responding to the Fed's policy shift after the FOMC slashed rates by 100 bps in a single quarter due to concerns that the labour market was cooling too fast.

The outcome could prove decisive for projecting when the next rate move by the Fed may come. While markets remain convinced January will see no rate cut, future pricing shows uncertainty between March and May meetings for the next easing, according to FedWatch. With the ECB expected to cut rates faster than the Fed, the timing of future Fed cuts will likely drive EURUSD, with a slower Fed dragging the pair lower.

Rising Flag Points to Upside

EURUSD may be forming a rising flag pattern on the 1-hour chart, suggesting potential for continued upward momentum in the immediate aftermath of the descending trendline breakout. Current price action sees support near 1.0300, with the recent rejection at 1.0275 providing additional backing. A breakout above 1.0358 could trigger renewed buying interest, eyeing 1.0376 and 1.0437 above the 1.0400 handle. However, failing to hold the line might push the pair deeper to 1.0223, with a break exposing the swing low of 1.0200 and the 1.0150 invalidating the flag.

Source: SpreadEx / EURUSD

Key Takeaways

The upcoming NFP report on Friday will offer insights into the near-term direction of EURUSD. Markets expect moderate numbers of jobs added and a healthy unemployment rate. If the narrative changes about when the ECB eases compared to the Fed, the pair could come under pressure. Markets will keep an eye on the interest rate differential outlook as a key determinant of future direction.