Yesterday, bulls made another unsuccessful attempt to consolidate above the resistance level of 1.0940 (the upper band of the Bollinger Bands indicator on the four-hour chart). The pair came under pressure from bears again. However, a subsequent decline was quite modest. By and large, the pair's upside momentum just fizzled out. The nearest support level is located at 1.0860 (the Tenkan-sen line on the daily chart). Currently, the euro/dollar pair is trading at around 1.0900. The situation is rather uncertain. Traders do not want to risk opening large positions ahead of the publication of key data on the US labor market.
Why nonfarm payrolls are so important
According to the weekly chart, the EUR/USD pair has been in an uptrend since late February. Before that, the price had traded downwards for four weeks. As a result, it slid to the local low of 1.0537 from 1.1034. A bullish reversal occurred after a large US bank collapsed. This in turn forced the Federal Reserve to take a softer approach to monetary policy. Notably, just a few days before the bankruptcy of SVB, Jerome Powell delivered a fiery speech to the US Congress, which supported the US currency. He said that the ultimate interest rate level would likely be higher than previously assumed, and also announced the possible need to raise the rate more sharply. As a result, the market began to price in that the regulator would return to a half-percentage-point rate hike, with the final rate at 5.75%.
However, the collapse of Silicon Valley Bank neutralized the hawkish tone of the Federal Reserve. Among traders, rumors began to spread that the US central bank would postpone the rate hike due to shocks in the banking system. Although these expectations were not confirmed, the position of the American regulator has nevertheless softened noticeably. In fact, Jerome Powell admitted to implementing a "dovish" scenario within the current year. If the head of the Fed had denied such assumptions earlier, at the March meeting he stated that rate cuts this year "is not the base scenario."
According to the updated median forecast, the regulator has one more rate hike in reserve. However, the final decision (about a pause or an increase) will be made by the Federal Reserve at its next meetings.
As of today, there is no consensus in the market on the possible outcome of the next FOMC meeting to be held in May. Market sentiment is fickle. Last week, traders were expecting a 25-point rate hike next month (according to CME FedWatch Tool data). This week, market players anticipate the regulator remaining the key rate unchanged, taking into account downbeat ISM indices in the US manufacturing and services sectors. Currently, the market is pricing in a 55% chance of the Fed soon pausing.
This disposition increases the importance of tomorrow's report. If US nonfarm payrolls turn negative (especially if the inflationary component of the report - wages - falls), the likelihood of taking a wait-and-see approach will increase again. This will put additional pressure on the dollar.
Gloomy ADP National Employment Report
The ADP National Employment report can be regarded as a "preview" of Friday's nonfarm payrolls. This report proved to be negative, showing that private payrolls increased by 145,000 jobs. This came as a surprise to the market as most experts forecasted a more significant increase of 208,000 jobs. It is worth noting that recently, the report has demonstrated a rather high correlation with the official release. So negative March data from the ADP suggests that tomorrow's statistics will also be gloomy.
Preliminary forecasts for March nonfarm payrolls indicate that the US labor market will not impress sellers of the EUR/USD pair. Unemployment in the United States is expected to rise slightly, reaching 3.7%. US nonfarm payrolls are forecast to increase at a slower pace compared to the previous month, by 230,000 in March. Wage growth is anticipated to decline. In annual terms, the indicator is likely to come in at 4.3%, the weakest growth rate since September 2021.
Even if Friday's report meets analysts' forecasts, the greenback will most likely come under strong downward pressure. Judging by the ADP report, such a scenario is quite likely.
From a technical point of view, on the daily chart, the EUR/USD pair is still trading between the middle and upper bands of the Bollinger Bands indicator and above all the lines of the Ichimoku indicator. The 1.0980 mark can be seen as the nearest target (and so far the main one) of the pair's upward move. This level corresponds to the upper band of the Bollinger Bands indicator on the daily chart. Considering the current fundamental factors, downside price momentum can be considered as a reason for opening long positions.
