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The first signs of weakness in the US labor market provided a strong argument that the EUR/USD correction would develop into breaking the downtrend. This requires further cooling of the US economy, however, the eurozone may also help the euro bulls. Although the bloc's GDP has not yet recovered, positive signs from business activity and other indicators suggest a bright future for the eurozone.
A strong labor market, optimistic wage growth, and inflation slowing down towards 2%, seemingly create ideal conditions for consumers to loosen their purse strings. This is what the European Central Bank predicted, yet it was wrong every time. The eurozone population remains cautious against the backdrop of turmoil in the form of armed conflict in Ukraine and the energy crisis, which has led to an economy teetering on the brink of recession.
However, adapting to new conditions, falling gas prices, and swift monetary expansion are pushing Europeans from savings towards consumption. This is already reflected in the GDP data for the first quarter. The indicator increased by 0.3% quarter-on-quarter compared to the +0.4% growth in GDP in the United States. The divergence in economic growth is becoming smaller, which is a compelling argument in favor of buying EUR/USD.
The market currently expects the ECB to start lowering its rate in June and the Federal Reserve in September. The scale of the ECB's monetary policy easing in 2024 is estimated at 75 basis points, while that of the United States is at 50 basis points. However, if new data indicates further cooling of the US economy, the market will return to the scenario of three Fed rate cuts, as envisioned in the March FOMC forecasts. The bears will not have a strong advantage, so EUR/USD will be able to continue its rally.
Everything could change with the US inflation report for April. Investors will turn to the dollar if inflation accelerates once again. However, judging by the drop in energy prices due to de-escalation of geopolitical conflict in the Middle East, the cooling labor market, including the slowdown in average wages, and the overall US economy, the downward trend in CPI and PCE will likely recover soon. This is excellent news for EUR/USD bulls.
Interestingly, one of the main hawks, Michelle Bowman, is confident about this. Despite the existing risks of accelerated inflation, the downward trend remains intact. If the disinflation process resumes, the Fed may not wait until September and could lower rates in July.
Technically, on the EUR/USD daily chart, the fact that bears could not return the quotes to the fair value range of 1.061-1.074 indicates their weakness. Bulls continue their attack towards the target at 1.108 according to the Wolfe Wave pattern. Traders may consider long positions.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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