The EUR/USD pair is experiencing a mild downward trend on Friday, retracing a portion of its recent overnight recovery gains. Despite a modest rebound, the pair continues to trade below the 1.0800 psychological level as the market awaits the release of the highly anticipated US Nonfarm Payrolls (NFP) report.
EUR/USD had previously found itself in the mid-1.0700s, marking a three-week low. However, a lack of significant selling pressure has prevented a more pronounced decline ahead of the crucial employment data.
Investors are closely monitoring the NFP report for further insights into the labor market's condition, particularly whether it shows signs of loosening. A shift towards a dovish stance by the Federal Reserve (Fed) is contingent on evidence of a less robust labor market. Market participants increasingly believe that the Fed has concluded its policy-tightening efforts and are now pricing in a higher probability of a 25 basis point rate cut as soon as March 2024. Therefore, the NFP report's impact on the Fed's policy outlook will influence the demand for the US Dollar (USD) and subsequently affect the EUR/USD pair.
In the lead-up to this critical data release, the resurgence of US Treasury bond yields has attracted buyers to the USD, counteracting the pair's overnight retracement from a two-week high. This, coupled with recent dovish comments from European Central Bank (ECB) officials, is applying downward pressure on EUR/USD. ECB board member Isabel Schnabel, earlier in the week, indicated that further interest rate hikes may no longer be necessary due to a significant decrease in inflation. Such remarks are undermining confidence in the Euro and capping potential gains for the currency pair.
From a technical perspective, the failure to break above the technically significant 200-day Simple Moving Average (SMA), which has now turned into resistance, favors bearish sentiment. However, a sustained break below the 100-day SMA, currently positioned around the 1.0765-1.0760 range, would be a crucial signal for traders looking for a continuation of EUR/USD's recent significant pullback from the 1.1015 area, which was reached last month and marked the highest level since August. Despite the mild recovery, the pair is set to record losses for the second consecutive week, signaling ongoing bearish sentiment.