- The EUR/USD is trading near its highest level in over a month ahead of the release of key US inflation data that will have a strong and direct impact on the future of Fed policy.
- It gained above the 1.0825 resistance level before settling around 1.0815 at the time of writing.
- As forex markets await key US data that will affect the dollar and overall market sentiment, strong wage growth in the eurozone at the beginning of the year will not do much to soothe the nerves of ECB officials who are considering how much they can cut rates.
Economic data from the largest economies in the bloc shows that negotiated wage increases failed to slow significantly in the first quarter. The danger is that companies will pass on rising costs to consumers, keeping inflation above 2% for longer. Germany is the main culprit, with previous deals - some embellished with one-off payments - driving wages up sharply. Policymakers are unlikely to find much solace in evidence suggesting moderation elsewhere in the region.
Therefore, while the initial June cut in the deposit rate is almost certain to continue, any hopes of another quick move the following month are receding. Meanwhile, supporting the cautious mood is stronger-than-expected economic growth in the 20-nation bloc - even as inflation eases towards target. Wage gains are likely to have slowed to 4.3% year-on-year in the first three months, compared to 4.5% in the fourth quarter of 2023, according to Bloomberg Economics. It added that while they did not exceed 3.5% in France, Italy, and Spain, they reached 4.8% in Germany.
For the ECB, part of the challenge is that negotiations work very differently across the continent. While many contracts in Belgium are directly linked to inflation, German and Italian workers often must wait for new rounds of talks that set compensation over several years.
In France, bargaining is more flexible and salaries in a range of sectors are agreed once a year, economists at Barclays said last week in a note. These complexities are reflected in the range of perspectives in the first quadrant. Meanwhile, ING's Brzeski expects an acceleration to around 5%, Nomura analysts expect steady growth of 4.5%, and estimates at Barclays point to a slowdown to around 4%. In this regard, Christian Keller, an economist at Barclays, said: “There are some indicators from the labor market indicating a slowdown in wage growth in the euro area.” Added, “This should contribute to a further slowdown in inflation, which is already more pronounced than in the United States.” “.
Consequently, the less optimistic point to a tight Labor market that ignored the shallow recession in the second half of 2023. Germany has seen a series of transport strikes this year. Holger Schmieding, chief economist at Berenberg, said: "Labor shortages will put upward pressure on wages." Added, "So we don't expect nominal wage growth to settle below 4% on a sustainable basis."
Official data on negotiated wages is due for release on 23 May, with another closely watched gauge of wage growth for Q1 from Eurostat due on 7 June - a day after the ECB's next rate decision. With timely information scarce, officials in Frankfurt have sought to provide more clarity through newly developed eurozone wage tracking tools. These continued to "show signs of easing," according to the April policy meeting minutes, released on Friday. Also, Rate-setters stressed that corporate profits should absorb some of the higher Labor costs after margins have widened in recent years.
Ultimately, The ECB's policy showed that to what extent this is happening in the services sector - the main focus at present - is uncertain.
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EUR/USD Technical Analysis and Forecast:
According to the performance on the daily chart, the EUR/USD currency pair is moving within an upward channel. As mentioned before, a shift in the overall trend to an upward direction will require a move towards the resistance levels of 1.0830 and then the psychological resistance of 1.1000 consecutively. Conversely, over the same timeframe, a return to the support level of 1.0720 will provide strong momentum for the bears to move towards the psychological support of 1.0600 consecutively.
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