EUR/USD rallied on Friday and may remain elevated as investor expectations for Fed rate cuts were reinforced by the latest round of U.S. data. The month-on-month June core PCE came in at +0.2% versus the consensus of +0.1%. Although the result was higher than estimated, the reported number was rounded up from +0.1818%, which may have muted the data's impact. Personal income surprised to the downside, coming in at +0.2% against +0.4% estimates and May's +0.4%. The slower income growth could signal a weaker jobs market.

Following the data release, U.S. yields and the dollar softened as investors still expect the Fed to cut more in 2024 than its own projections indicate. Short-term rates markets show a near 90% probability of the Fed cutting a total of 75 basis points in 2024. The dollar's yield advantage over the euro decreased as German-U.S. spreads tightened, helping to underpin EUR/USD. Investors' focus now turns to the July employment report due next Friday. A Reuters poll estimates that July non-farm payrolls growth will fall to 175k from 206k in June, with the unemployment rate remaining at 4.1%. Downbeat payrolls and an upside unemployment surprise could lead to a sharp fall in yields and the dollar, increasing expectations that the Fed will be less restrictive.

In New York, EUR/USD opened near 1.0855 after trading at 1.08425 overnight on EBS, with the rally extending throughout the day. Yields slid, and spreads tightened after the PCE and spending data. EUR/USD climbed above the 5-DMA, hitting 1.0868 and ending up 0.14% late in the day. Rallies in equities and gold helped keep riskier assets buoyed. However, the EUR/JPY drop towards 167.00 and the USD/CNH rally likely limited EUR/USD's upside.

Technical indicators offer some comfort to EUR/USD longs, with rising RSIs and the pair holding above the 21- and 200-DMAs. Nonetheless, the ongoing consolidation of the drop from the July 17 high may concern some investors. The upcoming Fed meeting and Powell's press conference will attract significant attention next week. Additionally, key data risks include the U.S. June JOLTS report, July ADP employment report, and the July non-farm payroll report. These events will be crucial in shaping investor expectations and EUR/USD's direction.

Open an account today to unlock the benefits of trading with CMS Financial

Open Account Now 💼