Investing.com -- EUR/USD enjoyed its strongest one-day move in two months, surging to its highest level since late-October, as the dollar continued to retreat from last week's Bank of Japan-driven rally, amid signals of slowing economic growth and decelerated job gains in the labor market.
The weak data comes ahead of the release of a highly-anticipated January U.S. jobs reports on Friday. A poor reading could compel the Federal Reserve to slow its pace of tightening, as it weighs whether to raise short-term interest rates in March. the The euro, meanwhile, could be the chief beneficiary of a dovish Fed, as the European Central Bank mulls a decision to push interest rates deeper into negative territory.
On Wednesday, the currency pair traded in a broad range between 1.0904 and 1.1145 before settling at 1.1098, up 0.089 or 1.64% on the session. The euro has now closed higher against the dollar in seven of the last eight sessions. After ending last year below 1.09, EUR/USD has gained more than 2% since January 1.
EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.
On Wednesday morning, the ADP Research Institute said in its January employment report that private payrolls last month rose by 205,000. While the figure came in above consensus estimates of 190,000, it fell considerably below December gains of 257,000. The ADP employment report is widely viewed as a precursor for Friday's government report from the U.S. Department of Labor.
The Labor Department's Bureau of Labor Statistics is expected to report on Friday that nonfarm payrolls increased by 188,000 in January, falling sharply from December's robust gain of 292,000. It would mark the first month that the figure dipped under 200,000 since September. The unemployment rate, meanwhile, is expected to remain unchanged at 5.0%. Many economists are more concerned with the pace of wage growth amid soft hourly earnings over the last year. A major uptick in earnings could bolster wage push inflation and help the Federal Reserve move closer to fulfilling both legs of its dual mandate.
Although Core PCE Inflation ticked up by 0.1 to 1.4% in January, it still remains considerably below the Fed's targeted objective of 2.0%. The Core PCE Index, which strips out volatile food and energy prices, is the Fed's preferred gauge for inflation. Separately, the Institute of Supply Management said Wednesday morning that its Non-Manufacturing Index last month fell sharply by more than 2 points to 53.5, far below consensus forecasts for a 55.5 reading. Major declines in output and employment growth pushed the index to its lowest level in 23 month. The survey accounts for roughly 90% of the U.S. economy.
Further signs of subdued growth in the economy and sluggish inflationary pressures could convince the Fed to delay its next interest rate hike beyond the first quarter. After tumbling approximately 5% in January, the major U.S. indices are coming off their worst month to start a year since the Financial Crisis. Yields on the U.S. 10-Year, meanwhile, slumped to 10-month lows on Wednesday at 1.793%, before recovering to close at 1.883%, up three basis points.
"The tightening of financial conditions that has taken place since the Fed began raising short-term rates in mid-December is a matter of considerable concern to the Fed," Federal Reserve Bank of New York president William Dudley told Market News on Tuesday.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, plummeted by more than 1.65% on Wednesday to an intraday low of 96.89 before rebounding slightly to close at 97.25. The dollar has slumped approximately 2.4% since reaching a two-week high last Friday, after the Bank of Japan bolstered the greenback with a surprising decision to push interest rates into negative territory.
With the surprise move, two of the top three central banks are now offering negative interest rates for the first time on record. In effect, the BOJ's decision helps the Fed tighten its monetary policy cycle without raising interest rates.