Euro-Dollar Looks to Clock 4th Consecutive Weekly Advance

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Further signs of U.S. labour market weakness have helped the Euro to Dollar exchange rate to a fourth consecutive weekly advance, and we can expect a fifth weekly advance if next week's U.S. inflation report comes in softer than predicted.

Dollar exchange rates continue to retrace 2024 strength, with the most recent declines being attributed to fresh evidence that the U.S. economy is cooling.

"The dollar was slammed lower as traders interpreted the cracks in the labor market as a harbinger of cooler inflation ahead, which in turn would allow the Fed to cut interest rates faster," says Marios Hadjikyriacos, Senior Investment Analyst at XM.com.

Applications for unemployment benefits - initial jobless claims - rose by a brisk 231K last week, which is usually an early sign of workers being laid off. "The highest reading in nearly nine months supported the case for rate cuts," says analyst John Meyer at the SP Angel.

"This is another indication that the jobs market is losing momentum, following an uptick in the unemployment rate last month and warnings from business surveys that companies have started to reduce workforce numbers," says Hadjikyriacos.

Euro-Dollar rose above the 1.07 marker last week after the official jobs report showed non-farm payrolls increased 175K in April, down from March's 315K and undershooting expectations for 238K.

The official unemployment rate unexpectedly rose to 3.9% from 3.8% while average hourly earnings rose 0.2% month-on-month in April, down from the previous month's 0.3% and below expectations for 0.3%.

"Our bullish USD view has been based on two motivating pillars: the dollars carry advantage despite being a defensive currency and persistent U.S. exceptionalism. The former remains intact, but the latter appears to be in the early stages of losing its sheen," says Meera Chandan, an analyst at JPMorgan in London.

Above: EUR/USD at weekly intervals. It is still too soon to say the trend has turned. Track EUR with your own custom rate alerts. Set Up Here 

Euro-Dollar continues to be driven by the bigger Dollar, meaning the advance will depend on further signs of a U.S. economic slowdown. 

"Next week will be critical for the US dollar, featuring the simultaneous release of the latest retail sales and CPI inflation prints on Wednesday. It is a rare phenomenon for two top-tier US economic datasets to be released together, which sets the stage for heightened volatility in the markets," says Hadjikyriacos.

Valentin Marinov, Head of FX Research at Crédit Agricole, says in the absence of any significant upside inflation surprises or hawkish signals from the Federal Reserve, global financial conditions should remain supportive for FX carry trades.

The Dollar is a leading beneficiary of the carry trade, a trade that sees investors borrow in low interest rate currencies (JPY, CHF) and invest in high interest rate currencies (USD).

"Next week’s US CPI and retail sales as well as Fed speeches (including a speech by Jerome Powell on 14 May) would thus attract considerable attention," says Marinov.

For now analysts see weakness as a counter-trend correction from overbought conditions, but doubts about the Dollar's ability to retest 2024 highs will grow if next week's inflation figures suggest the stalled disinflation process is underway again.