The EUR/USD pair crashed on Thursday evening after positive economic numbers from the United States boosted hopes that the Fed will hike rates faster than expected. The pair dropped by more than 1% and fell to the lowest level since May 14.
Strong US data
Recent economic data from the United States have been strong. In May, data revealed that the American consumer price index rose by 4.2% in April while the producer inflation jumped to 6.2%. Further, the personal consumption expenditure, which is the Fed’s favorite inflation figure, rose at the fastest pace in almost 30 years.
The positive streak of strong readings continued this week. Earlier on, data by Markit and the Institute of Supply Management (ISM) showed that the manufacturing PMI remained above 50 in May, which is evidence that the sector is doing well.
And yesterday, the two firms said that the services and non-manufacturing sector PMI rose to 68 and 70, respectively. A PMI figure of 50 and above is usually a sign that an industry is doing relatively well as the country reopens. This is notable since the service sector is the biggest employer in the country.
Labor market tightening
Further data revealed that the labor market is tightening. According to ADP, private employers in the country added more than 978,000 jobs in May after adding 654k in the previous month. This was a better figure than the median estimate of 650k.
Meanwhile, the number of Americans filing for initial jobless claims declined to 385,000, the lowest level since the pandemic started. This was a better number than the median estimate of 390k. As a result, the continuing jobless claims rose to 3.77 million.
These numbers prove that the labor market is tightening as the economy reopens. Indeed, many companies like McDonald’s and Starbucks have been forced to hike their salaries to deal with the labor shortage.
Later on Friday, the Bureau of Labor Statistics will publish the latest non-farm payroll numbers. Economists expect the data to show that the economy added more than 650k jobs in May after it added 266,000 in the previous month. They also see the unemployment rate falling from 6.1% in April to 5.9% in May.
Fed and ECB diverging?
While the US has published strong numbers lately, the Fed remained convinced that the situation is transitory. As such, they have hinted that the current monetary policy will remain intact for longer.
Meanwhile, data from Europe have been strong as well. The numbers showed that the manufacturing and services PMIs and inflation did well. For example, in May, preliminary figures showed that the headline CPI rose to 2.0%, which is the ECB’s target.
Therefore, EUR/USD traders are concerned that the ECB could move faster than the Fed. For one, the ECB rarely pays attention to the performance of the stock market. Also, other banks like the RBNZ and Bank of Canada have started tightening.
EUR/USD technical analysis
The four-hour chart shows that the pair has been forming an ascending channel in the past two months. The pair also formed a double-top pattern at around 1.22260. In price action analysis, a double-top pattern is usually a bearish signal.
And on Thursday, the pair managed to move below the lower side of the ascending channel and the 23.6% Fibonacci retracement level. Therefore, the outlook for the pair is bearish, with the next key level to watch being the 38.2% retracement level at 1.2050.