Since the USD and EUR are used as funding currencies for carry trades, what the markets are looking for are hints of any future changes to their respective central bank’s (CB) monetary policy that would lead to a rise in interest rates (which makes a funding currency more expensive and thus less attractive).
There are a series of actions that need to happen before CBs can even think about raising interest rates. For example, first tapering their large-scale asset purchases (LSAPs).
Any tapering would be considered “hawkish” because it moves the central bank one step forward in the long road that ends with an interest rate hike.
Also, since LSAPs are being tapered, that means less currency being created, which means less supply (in the context of “supply and demand”).
Current market expectations for tapering are that it won’t happen until next year or later. These expectations fluctuate based on data released And it is this constant shift in expectations is what causes prices to move.
Any economic data (such as NFP) that causes expectations to accelerate that timeline (for tapering) would be bullish for that currency. And vice versa.
One of the things that markets are looking for is who will taper LSAPs first? The Fed or ECB?
That said, there is never just one factor that influences price action.
Just to name a few:
risk sentiment (whether risk-on or risk-off),
- foreign capital inflows searching for USD or EUR-denominated assets like equities, and
- the current flood of liquidity that the Fed is trying to manage to prevent negative short-term interest rates due to a cash-collateral imbalance, seen by the massive surge in overnight reverse repos (ON RRP).
Trading (in any market, not just FX) is not that simple.