Euro down awaiting NFP report

The Euro may be set for a boost next week against the US dollar if the European Central Bank derails the predictions for interest rate cuts in the first half of next year.

Economists at Commerzbank, one of Germany’s leading banks believe the ECB will be under pressure to forgo a rate cut in the near future as inflation will only fall to the 2.0% target in 2025. The Euro has fallen over recent weeks as the market brought forward the timing of the first cut to April and increased expectations for the total number of cuts that would come in 2024.

"Some reasons speak against rapid rate cuts. The strong rise in wages continues to argue against a sustainable return of the inflation rate to the ECB's target in the near future." said Jörg Krämer, Chief Economist at Commerzbank.

If the ECB is successful at tapering down expectations of a rate rise, the Euro could retrace some of its recent losses as markets lower the odds for an April hike.

Markets brought forward the timing for the first rate cut to April after Eurostat said Eurozone inflation fell to 2.4% year-on-year in November, leading to expectations that the Eurozone would hit the 2.0% inflation  target, far earlier than expected.

However, strong wage growth continues hang over the Eurozone and provides ammunition for the ECB to keep rates on hold for longer.

"The strong rise in wages continues to argue against a sustainable return of the inflation rate to the ECB's target in the near future. The year-on-year increase in collectively agreed wages picked up once again in the third quarter to 4.7%, the highest value since the beginning of the time series," added Mr Krämer.

Looking further ahead today, the main drivers of the EUR/USD currency pair will be the all important non farm payrolls figures from the US which is seen as the main driver to dictate what the US Federal Reserve will do with interest rates moving forward.

The US labour market report is likely to show that the economy created 180K jobs last month, an increase of 30k from the150K reported in October. The Unemployment Rate is set to remain unchanged at 3.9%.

A closely-watched measure of wage inflation, Average Hourly Earnings, is expected to inch higher by 4.0% in the year through November, a tad down from October’s 4.1% increase. On a monthly basis, Average Hourly Earnings are forecast to rise 0.3% in the reported month, compared to a 0.2% increase in October.

Market participants now seem convinced that the US central bank is done with its policy-tightening campaign and are now pricing in a greater chance of a 25 bps rate cut as early as March 2024. This may change if the NFP comes in above expectations.