EUR/USD: A busy week ahead with Fed & ECB minutes as well as Nonfarm Payrolls

• EUR/USD will be vulnerable to critical events in the week ahead. 
• US data will be watched closely as will the Fed and ECB minutes. 

EUR/USD was down some 0.5% on Friday due to the pick-up in pessimism about the global economic outlook. The US dollar has found its feet yet again due to the demand for the safe-haven currency. The euro fell to a low of 1.0365 vs the greenback from a high close to the 1.05 area.

The potency of tighter monetary expectations in the face of higher in inflation is playing havoc on markets and supporting demand for US assets which has sent the benchmark 10-year US Treasury yields to one-month lows. 

The Federal Reserve is expected to continue to hike rates in the face of soaring price pressures at the same time that investors are worrying over the economic outlook. Data on Friday did little to squash the concerns with US manufacturing activity slowing more than expected in June, with a measure of new orders contracting for the first time in two years.

Nevertheless, the US dollar index gained 0.36% against a basket of currencies to 105.12, albeit still trading shy of the 20-year high of 105.79 reached on June 15. This has crippled the euro, putting the focus back on the five-year low of $1.0349 printed on May 13 even though the European Central Bank is also expected to raise interest rates this month. This will be the first time in a decade, although economists are divided on the size of any hike.

The week ahead

The minutes of the ECB’s June meeting will likely be eyed but analysts at TD Securities said they will be ”somewhat stale as we have since heard from many officials at the Sintra conference. That said, we will look for any indication of what is needed for an above 25bps hike in July, and how the risks of weaker growth could impact policy beyond that, given the further deterioration of growth prospects in the euro area.”

Instead, the major focus for the week ahead will lie in the US data once again. Nonfarm Payrolls is expected to show that Employment likely continued to advance firmly in June but at a more moderate pace after three consecutive job gains of around 400k in March-May, the analysts at TD Securities said. ”High-frequency data, including Homebase, still point to above-trend job creation. We also look for the UE rate to stay unchanged at 3.6% for a fourth straight month, and for wage growth to remain steady at 0.3% MoM (5.0% YoY).”

Fed minutes will also be eyed after the Fed’s meeting where it surprised markets with a 75bps hike at the June meeting. ”Persistent high CPI inflation and nascent signs of de-anchoring inflation expectations forced the Fed to amp the pace of rate tightening. The meeting minutes are likely to offer further colour around the Fed’s more hawkish reaction function,” the analysts at TD Securities said.