EUR/USD Recovers from 50-Day SMA as US NFP Report Is Released

Discussion Points Regarding the EUR/USD Rate

The EUR/USD is struggling to hold its gains from earlier this week after testing the 50-Day SMA (1.1173), and new data prints from the US may weigh on the currency, as the US Non-Farm Payrolls (NFP) report is expected to show more improvement in the job market.

With the US NFP report on the horizon, the EUR/USD is reversing from its 50-day moving average.

EUR/USD falls from a new weekly high (1.1185) as European Central Bank (ECB) Chief Economist Philip Lane calms speculation about a monetary policy shift, stating that "the degree of monetary policy stimulus put in place to address the pre-pandemic challenge of persistent below-target inflation can be gradually normalised towards a more neutral setting."

Lane continues, "the calibration of net purchases for the third quarter will be data-dependent and reflect our evolving assessment of the outlook," implying that the Governing Council is not in a hurry to normalize monetary policy, as the board member insists that "any adjustments to our interest rates will be gradual."

As a result, diverging monetary policy paths may continue to produce headwinds for EUR/USD as the Federal Reserve plans to implement a series of rate hikes over the coming months, and the NFP report may push the central bank to normalize monetary policy at a faster pace as the economy is expected to add 490K jobs in March.

At the same time, the unemployment rate is expected to fall to 3.7 percent from 3.8 percent during the same period, the lowest reading since February 2020, and this development may force the Federal Open Market Committee (FOMC) to adjust its exit strategy at the next interest rate decision on May 4, as the central bank "expects to begin reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities at a coming meeting."

Until then, the EUR/USD may struggle to maintain its gain from the yearly low (1.0806) as the FOMC normalizes policy ahead of its European counterpart, while the retail mood tilt appears certain to continue, as traders have been net-long the pair since the middle of February.

The number of traders net-long is 9.25 percent greater than yesterday and 10.55 percent lower than the previous week, while the number of traders net-short is 16.67 percent lower than yesterday and 1.78 percent lower than the previous week. The decrease in net-long interest has reduced crowding behavior, as 63.95 percent of traders were net-long EUR/USD earlier this week, while the decrease in net-short position comes as the currency manages to test the 50-Day SMA (1.1173).

Having said that, the EUR/USD may continue to pull back from the moving average as the US NFP report is expected to show further improvement in the labor market, and the advance from the yearly low (1.0806) may turn out to be a correction in the broader trend given the ECB and FOMC's diverging paths.