The EUR/USD uptrend loses steam, but no relief for the USD in sight (Daily analysis 9.05.2023)

The downward momentum seen in the dollar over the past month has dimmed somewhat. The EUR/USD hovers around the 1.10 mark as the investors seem to await signs of economic developments following the emergence of tensions in the US banking sector. Currently, the market is pricing that the Federal Reserve will cut interest rates as early as September and reduce them by a total of several dozen basis points before the end of the year. Such a hefty pricing of future cuts that a series of weak data is likely to be required to resume the dollar's dynamic discounting.

Last week, the Fed raised rates to a range of 5-5.25%, thus ending the cycle fourteen months after the first rate hike. Historically, a few months after the last rate moved upwards, cuts began, and investors hope for a re-run of such a scenario. Particularly important for future Fed moves will, of course, be the labour market, which for the time being, is holding firm. The economic trend in this area of the economy is slowing down but at a very slow pace.

In April, more than 250,000 new jobs were created in the non-farm sector. The unemployment rate returned to cyclical lows (3.4%) and wages grew more strongly than forecast. These readings helped to weaken fears of a deep recession in the US. The most important reading this week will be tomorrow's inflation reading, after which the market expects the core rate to decelerate from 5.6 to 5.5% y/y and consumer inflation to remain at 5% y/y. However, it seems that the status quo in the perception of central banks' attitudes will suffice for the EUR/USD to climb steadily. Due to the ongoing tensions in the US banking sector, the investors should limit their exposure to the US markets, hurting the USD.