Euro Faces Growing Downside Pressure Ahead of US Jobs Data, MUFG Warns

The euro is facing increasing downside risk against the US dollar as markets turn their attention to the upcoming US non-farm payrolls (NFP) report, according to a new analysis from MUFG Bank. The Japanese lender’s currency strategists highlight that the single currency is losing momentum amid diverging monetary policy expectations and a resilient US labor market.

MUFG’s Bearish Outlook on EUR/USD

In a note published this week, MUFG analysts pointed to a building downside bias for the euro-dollar pair, driven by the market’s anticipation of stronger-than-expected US jobs data. The NFP report, scheduled for release on Friday, is widely seen as a key catalyst that could reinforce the Federal Reserve’s hawkish stance, further widening the policy gap with the European Central Bank.

The analysts noted that the euro has struggled to hold gains above the 1.08 level against the dollar, with technical indicators suggesting limited upside momentum. ‘The near-term outlook for EUR/USD is increasingly skewed to the downside,’ the MUFG note stated, ‘as the market prices in a more resilient US economy and a Fed that remains reluctant to cut rates prematurely.’

Diverging Central Bank Paths

The divergence between the Fed and the ECB remains a central theme in currency markets. While the ECB has signaled a potential rate cut in June, the Fed has pushed back against market expectations for early easing, citing sticky inflation and a strong labor market. This policy gap has historically favored the US dollar, and MUFG believes the NFP data could amplify this trend.

Economists polled by Reuters expect the US economy to have added 200,000 jobs in March, with the unemployment rate holding steady at 3.9%. A print at or above expectations would likely reinforce the dollar’s strength, while a significant miss could trigger a short-term euro rebound. However, MUFG’s base case remains bearish on the euro, arguing that even a modestly weaker NFP figure may not be enough to reverse the broader trend.

What This Means for Traders

For currency traders, the key takeaway is the elevated risk of a sharp move lower in EUR/USD following the NFP release. MUFG advises caution, noting that positioning data shows the market is already moderately short the euro, which could lead to a short-covering rally if the data disappoints. However, the overall bias remains toward a weaker euro, particularly if US data continues to surprise to the upside.

The analysis also highlights the importance of wage growth data within the NFP report, as average hourly earnings are a key input for the Fed’s inflation assessment. A strong wage print could further cement expectations for higher-for-longer US rates, adding to the dollar’s appeal.

Conclusion

MUFG’s latest assessment underscores the growing pressure on the euro as the market braces for a pivotal US jobs report. While short-term volatility is expected around the NFP release, the structural factors favoring the US dollar—stronger growth, higher yields, and a more cautious Fed—remain intact. For now, the path of least resistance for EUR/USD appears to be lower, barring a significant downside surprise in Friday’s data.

FAQs

Q1: Why is MUFG bearish on the euro?
MUFG analysts see a building downside bias for EUR/USD due to expectations of strong US jobs data, which could reinforce the Federal Reserve’s hawkish stance and widen the policy divergence with the European Central Bank.

Q2: How could the NFP report affect EUR/USD?
A stronger-than-expected NFP report would likely boost the US dollar, pushing EUR/USD lower. A weak report could trigger a short-term euro rally, but MUFG believes the broader trend favors the dollar.

Q3: What other factors are driving the euro’s weakness?
Beyond US data, the euro is under pressure from the ECB’s expected rate cuts, slower eurozone growth, and a lack of strong domestic catalysts to support the single currency.