Weakening US employment data suppresses the dollar; why is the EUR/USD approaching a weekly high and about to break through?

The US labor market signals a red flag, with rate cut expectations soaring to 90% overnight

This week’s most attention-grabbing news is the employment performance in the US private sector. According to ADP data, private sector layoffs in November reached 32,000, the most severe since 2023. The market had initially expected a gain of 10,000 jobs for that month, but instead saw a significant decline, directly rewriting market expectations for Federal Reserve policy.

As a result, investors’ bets on a 25 basis point rate cut during the December 9-10 Fed meeting surged to 90%. The US dollar fell in response to this news, becoming the biggest loser of the week.

Service sector remains resilient, but cannot stop the market’s bearish outlook on the dollar

Interestingly, the US November service sector data performed relatively well. According to the latest data from the Institute for Supply Management (ISM), the November Services PMI rose from 52.4 in October to 52.6, surpassing the market expectation of 52.1, indicating that the industry is still expanding steadily.

However, this positive data did not support a decline in the dollar. Market focus has been firmly on the deterioration of employment data, making the strong service sector performance seem insignificant by comparison. This also reflects that the market is more concerned about the US economy’s employment side rather than output.

The European Central Bank’s hawkish stance wanes, Eurozone PMI generally improves

In contrast, the latest remarks from ECB President Christine Lagarde provided strong support for the euro. She explicitly stated that the core inflation indicator remains aligned with the ECB’s 2% medium-term target and expects inflation to stay near the target “in the coming months.” This statement suggests that the pace of rate cuts may not be too aggressive.

Eurozone economic data is also improving. In November, both the HCOB Services and Composite PMI rose, with the Services PMI reaching 53.6, up from 53.1 in the previous month, hitting a new high since May 2023 and marking four consecutive months of growth. Manufacturing PMI in Germany and France also showed expansion, while only Spain’s Services PMI indicated a mild slowdown.

EUR/USD breaks key level, 1.1700 becomes the new focus

Under the dual influence of a weakening dollar and a relatively strong euro, the EUR/USD pair continued to rise this week. After rebounding from the intraday low of 1.1617, it is currently trading around 1.1668, with an increase of over 0.40% for the week.

From a technical perspective, after three days of consolidation, EUR/USD finally broke through the key support/resistance level of 1.1650, opening a new trading range between 1.1650 and 1.1700. The Relative Strength Index (RSI) indicates that buying momentum is continuously strengthening, laying a foundation for further upward movement. 1.1700 will be an important resistance; if successfully broken, testing the 1.1800 level and even the year-high of 1.1918 could become possible again.

Support levels and risk warnings

If EUR/USD falls below 1.1650 in subsequent trading, the first support level is the 50-day Simple Moving Average (SMA) around 1.1610, followed by the 20-day SMA at 1.1580, and finally the round number 1.1500. These levels will serve as important defensive lines for bulls.

This week’s European retail sales data and the policy speech by ECB Vice President Luis de Guindos are worth watching, while in the US, close attention should be paid to November layoffs and initial jobless claims data. The release of these data could further influence the pricing of Fed rate cuts.