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05.01.2018 01:26 AM
EUR/USD: Nonfarm payrolls and European inflation in focus

As expected, the Fed's "minutes" did not make a proper impression on the market. The strengthening of the dollar by several tens of percentage points was short-lived, and today the U.S. currency demonstrates its weakness again.

In fairness, it should be noted that if this protocol were published not in the period of reorganization the Fed, the dollar could receive tangible support. Members of the regulator expressed a very unexpected argument about the relationship between tax reform and the process of further tightening of monetary policy. Previously, the regulator's members did not have such a causal relationship, so this message was clearly "hawkish" in nature.

But traders have reasonably decided that this position is "obsolete", as many officials of the Federal Reserve either lost the right to vote this year, or will soon leave their post. New members of the Board of Governors (who fill 4 vacancies out of 7) may have a different opinion, so it is really inadvisable to make any forecasts based on the December meeting.

But tomorrow, a key indicator will be published, which will be relevant for any of the Fed. It is non-farms payrolls which will tell us regarding the state of the US labor market and inflation trends. The forecast is fairly stable: it is expected that 190, 000 jobs created in the non-agricultural sector, with an unemployment rate of 4.1%. And although 190,000 is slightly less than the results of the previous months, when the figure exceeded 200,000, these figures will still talk about the strength of the US labor market.

It is noteworthy that over the past 3-4 months, traders have virtually ignored this positive trend. The main focus of attention is focused on the indicator of the level of average hourly wages. The labor market traditionally demonstrates growth, and this fact is already perceived as an axiom.

Another question worrying market participants- why is inflation so weak at full employment? The level of wages is one of the key indicators that affect inflationary trends, so the dollar's reaction to tomorrow's nonfarm payrolls will depend on this release. Here the forecast was initially weak: + 0.3%. It should be noted that in November the indicator came out at the level of 0.2%, and in October fell completely into the negative area. In annual terms, the situation is slightly better, but the growth rate is still very low.

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I believe that if the dollar is under certain pressure, even if the figure comes at a predictable level. If the result turns out to be worse by at least one tenth of a percent, the pair eurusd will receive an additional impetus for its growth. The remaining dollar pairs will react accordingly. Therefore, do not be surprised if the dollar weakens against the background of remarkable figures for the US labor market - traders now only care about the growth of inflation.

European inflation tomorrow will also be in the spotlight. During the European session, the consumer price index will be published in the euro area. It should be noted that the euro/dollar is growing now not only at the expense of the weakness of the US currency. Look at cross-pairs EURCHF, EURGBP or EURJPY: the European currency dominates in each of them.

Interest in the euro was stoked by officials of the ECB. In particular, the member of the Board of Governors of the European Central Bank, Evald Novotny (the head of the Central Bank of Austria), announced a significant inflow of capital to Europe, positively assessing the economic prospects of the EU. His colleague Benoit Coeure not only agreed with this position, but also admitted that the ECB's October decision to extend the asset repurchase will be the last. The same opinion was expressed by the head of the Central Bank of Luxembourg, Yves Mersch.

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In other words, the representatives of the ECB are preparing the ground for the final completion of the QE program within this year. "By default" the only condition for this is an increase in inflation and a decrease in unemployment. The labor market in the EU has been growing for a year and a half (unemployment is already at the level of 8.8%), so the fate of the stimulus program, in fact, depends on the dynamics of inflation. That is why tomorrow's release is so important, especially as, according to preliminary forecasts, the consumer index is projected to grow to 1.4%. If the indicator at least minimally exceeds the forecast value, the euro will again rise in price throughout the market.

Support for the European currency is also provided by the oil market. Growth to a record $67 per barrel will undoubtedly affect the growth of inflation (not only in Europe, but also in Britain). In general, the optimism of the European market is eloquently confirmed by the dynamics of German bonds: after a decline at the beginning of this week, today the growth is everywhere.

From a technical point of view, the EURUSD pair continues to demonstrate the northern trend, and at all senior timeframes. After the expected corrective recession, the price rises again. It should be emphasized that within the framework of the correction, the lower limit of the new price niche 1.20-1.2081 was not penetrated. This means that the bulls of the pair have the potential for further growth: everything depends on the fundamental background, that is, from tomorrow's releases.

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The nearest resistance level still remains the mark 1.2105, which corresponds to the upper line of the Bollinger Bands indicator on the weekly chart. When fastened above this level, the next target can be considered the 1.2330 mark - this is the top line of the Bollinger Bands indicator, which coincides with the upper boundary of the Kumo cloud of the Ichimoku Kinko Hyo indicator.

Irina Manzenko,
Analytical expert of InstaForex
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