December 5, 2022 1:02 AM ET
By:AnalysisWatch
The EUR/USD is building on last week's breakout momentum above the very important 200-day SMA and gaining traction for the fourth consecutive day on Monday. The uptrend is driving spot rates to the 1.0585 area, the highest level since late June, and is supported by the prevailing bearish sentiment towards the US dollar.
The USD index, which measures the greenback's performance against a basket of currencies, falls to a five-month low in anticipation of less aggressive monetary tightening by the Fed. Market participants seem convinced that the Fed will moderate its stance and raise interest rates by only 50 basis points at its next meeting on Dec. 13-14. This, along with optimism about hopes for an easing of COVID-19 restrictions in China, continues to weaken the safe-haven dollar.
However, the positive monthly U.S. jobs report released on Friday supports the view that the Fed will continue to tighten monetary policy, albeit at a slower pace. A positive surprise in U.S. job gains and wages points to a further increase in inflationary pressures, underpinning Fed Chairman Jerome Powell's forecast of a higher-than-expected peak rate. This in turn provides some support to U.S. government bond yields, which should help limit USD losses and keep the EUR/USD pair in check.
In addition, European Central Bank (ECB) policymaker Francois Villeroy de Galhau was less hawkish, arguing for a 50 basis point rate hike in December. This might stop the bulls from placing new bets on the EUR/USD pair, at least for now. Traders are now waiting for the release of the final service sector PMI data in the Eurozone and the US. Later in the early North American session, the US ISM Services PMI is expected to help create short-term opportunities for the EUR/USD pair.