02.06.2023 06:29 PM
Dollar: the devil is in the details

What's happening with the U.S. economy? No one can provide an answer to this question. The latest employment statistics indicate that it is not responding to the most aggressive tightening of monetary policy by the Federal Reserve in decades! The indicator in May increased by 339,000! It not only surpassed the consensus forecast of Bloomberg experts but also exceeded the estimate of each of them. And such occurrences in 2023 are not happening for the first time. The labor market remains heated, which poses challenges for the EUR/USD.

For 14 consecutive months, the growth in non-farm employment in the U.S. has exceeded the forecasts of Bloomberg experts. While the pre-pandemic average increase was 187,000, in 2023, it reached 314,000! The current trend allows the Federal Reserve to raise the federal funds rate by 25 basis points to 5.5% in June without hesitation. However, the futures market has only slightly increased the chances of such an outcome, from 30% to 36%. Why?

Dynamics of employment and unemployment in the United States

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The devil is in the details. Unemployment rose to 3.7% in May. As history shows, if the indicator rises by 0.3% from a local low, it often continues to increase. The average wage growth has slowed down. Against the backdrop of impressive employment, this trend appears anomalous. The question arises: what should we believe? Unfortunately, this question can be asked regarding many other American macro-indicators.

While the services sector in the U.S. is growing rapidly, manufacturing is stagnating. Solid data, including retail sales, employment, and trade, have been pleasing recently. On the other hand, leading indicators, including business activity, have consistently disappointed.

Dynamics of solid and leading U.S. indicators

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Thus, expectations regarding the prospects of the American economy are regularly underestimated. In fact, actual data often turns out to be stronger than forecasts. We don't have to look far for an example—non-farm employment in the U.S. It is not surprising that the projected timing of the recession is being pushed back to more distant dates, and the market anticipates further interest rate hikes. Maybe not in June, but in July, with chances of 63%.

Regardless of the statistics, the final decision is made by people. What does the Federal Reserve want? To lower inflation to 2% in the long term and prevent the economy from sliding into a recession. It is not necessary to raise interest rates to achieve this. We can talk about it endlessly without taking action. The main thing is for the market to abandon the idea of a dovish pivot. Then, financial conditions will remain tight, which is necessary for reducing prices.

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In my opinion, the market understands all of this very well, which is why the stability of the EUR/USD after the release of strong employment statistics appears normal. The pair is quite capable of rising further, but we will have to forget about the resumption of the upward trend for some time.

Technically, if the EUR/USD consolidates above the resistance in the form of a moving average at 1.077, it will allow for the expansion of previously formed long positions with targets at 1.0805 and 1.0840.

Marek Petkovich,
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