The US dollar index is highly correlated with US bond yields. If we compare, for example, the dynamics of the greenback with the graph of the yield curve of 10-year Treasuries, then we can see almost one hundred percent coincidence - at least if we consider the time period of the last trading days.
For example, this morning the yield on bonds slightly decreased, afterwards the dollar index also fell, dropping to the local (daily) low of 90.65. A mirror situation occurred in the afternoon - the greenback spread its wings again, reacting to the situation on the US debt market. Only the negative macroeconomic statistics, which was published in America during the US session, cooled the ardor of dollar bulls. 10-year Treasury yields are still climbing up, while the greenback has slowed down. The current situation should serve as a wake-up call for those EUR/USD traders who are planning to enter short positions. After all, do not forget that Federal Reserve Chairman Jerome Powell is set to speak on Thursday, and the day after that the February Nonfarm report will be released. Today's reports (including the ADP report) came out in the red zone, acting as a counterbalance to the general optimism about the prospects for a spasmodic recovery of the American economy.
The US index of business activity in the service sector from ISM for the month of February came out at around 55.3 points, while most analysts expected to see it much higher - at 58.7. The indicator slowed down for the first time after three consecutive months of growth. Similarly, the ADP report was disappointing. According to the analysts, only 117,000 jobs were created in the US private sector in February. This result turned out to be almost two times lower than the predicted level - analysts expected to see this figure at the 210,000 mark.
In other words, a very alarming signal sounded in the form of a weak report from the ADP agency, which is a kind of "foreboding" on the eve of Nonfarms. If the official figures follow the trajectory of this release, the dollar will be under significant pressure again. To date, the consensus forecast on the official report suggests that the labor market will demonstrate weak, albeit growth in February. According to analysts, 130,000 jobs in the non-agricultural sector were created in the United States in February (this figure came out at the level of 44,000 in January, at around 227,000 decrease in December). But the unemployment rate should rise again - up to 6.5%. Thus, given the latest ADP report, there is still some intrigue regarding Friday's data. In my opinion, dollar bulls may not expect the upcoming figures to surpass the forecasted values.
In a separate line, you should pay attention to the inflationary component of Nonfarm - an indicator of the average hourly wages. A month ago, this indicator came out at 0.2% in monthly terms. This is also a rather weak result, and for the bulls of the pair, it is necessary for the Friday release to declare the resumption of positive dynamics. The inflationary component of Nonfarm is now important for EUR/USD traders, even outside the context of growth or decline in the number of employees. However, analysts are not optimistic here either - according to their forecasts, February salaries will remain at the January level.
As you can see, preliminary forecasts regarding Friday's Nonfarm do not promise support for the dollar. If the real figures do not reach the forecasted ones, EUR/USD bulls will have a reason to move up. However, such an occasion may appear earlier - following the results of Powell's speech. The Wall Street Journal is organizing a summit on Thursday, during which Powell will assess the current situation in the country's economy and comment on the latest trends. It is likely that he will also touch upon the growth of Treasury yields.
Earlier, Fed officials (including Powell) turned a blind eye to the increasing dynamics, but in recent days, yields, in particular, 10-year bonds, have updated annual highs. If Powell at least hints that the central bank may consider the option of targeting yields, then the dollar will collapse on all fronts, even against the euro. And although this option is currently unlikely, it still cannot be ruled out. After all, Powell may not announce such a move, but only "allow such a probability" – and this will be enough for the appropriate reaction of traders. By the way, the yield of European bonds is also growing, but here the ECB's reaction was not long in coming: several members of the European Central Bank reacted with very "aggressive" comments. Some of them (in particular, Fabio Panetta) said that the ECB should, if necessary, expand the purchase of bonds to curb yields.
Therefore, the bearish sentiment on the EUR/USD pair is unreliable. Against the background of weak macroeconomic reports and dovish comments from Fed members, dollar bulls will not be able to develop a large-scale rally – especially in the context of more or less wide time ranges. Therefore, moving down, the price can still be used as a reason for opening long positions. Yesterday's failed assault on the 19th figure once again confirmed the reliability of the support level of 1.2000 – to overcome it (and settle under it), the pair's bears need a fairly strong fundamental reason. And if Powell and the Nonfarm report are not on the side of the US currency, then the EUR/USD pair will be able to resume its growth to the nearest resistance levels. The first target for growth is the price of 1.2120 – this is the Tenkan-sen line on the daily chart. The main target is still the psychologically important mark of 1.2200, which corresponds to the upper line of the Bollinger Bands indicator on the same timeframe.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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