The US dollar on Friday received a long-awaited respite: Non-farm payrolls were better than expected - which means that the Fed is almost 100% likely to raise the rate in March and before the end of the year will return to this issue again.
The labor market is indeed a reliable ally of dollar bulls. Unemployment remained at a record low level of 4.1%, while the number of people employed in the non-agricultural sector increased to 200 thousand. However, the greatest surprise was caused by the inflationary component of non farms: the level of average wages. On a monthly basis, positive dynamics was registered (+ 0.3%), while the annual indicator grew by 2.9% (with a forecast of 2.6%). This suggests that inflation in the coming months could "come to life" and show a more significant growth after the near-zero (in monthly terms) targets of the past months.
Naturally, such strong numbers could not be ignored by the market. The American currency received its "moment of glory," which, incidentally, ended on Friday. Bears of the euro/dollar pair could not reduce the price even to the 23rd figure: a few hours after the publication of nonfarms, the pair regained growth.
In general, such a scenario did not come as a surprise, although a deeper and more prolonged correction for the pair was expected, up to the boundaries of the 20th figure. But the market showed restrained optimism. The fact of the rate increase at the March meeting is already largely taken into account in current prices, and the subsequent tightening of monetary policy did not excite traders. Abstracting directly from the Friday data, we can draw a very clear conclusion: the market actually ignores the positive messages of the Fed members and strong macroeconomic data. Politics has become at the forefront of the fundamental picture, and on both sides of the Atlantic ocean.
Let's start with the USA. On Friday, President Donald Trump declassified the report on biases by the FBI in an investigation into the head of state regarding his relations with Russia. I will not delve into the nuances of this report, since in the context of the currency market these details do not matter. But Trump's reaction to this document can lead to serious consequences.
The fact is that the US president can use this situation to dismiss the special prosecutor Robert Mueller, who is conducting an investigation into the case of external interference in the presidential election of 2016. On Friday, a representative of the Democratic Party, one of the most influential senators, Dick Durbin, said that if Trump decides on such an "gamble", the country is facing a serious constitutional crisis that has not been seen since Nixon's odious days. At the moment, the situation is in limbo: Trump does not take any action with regard to the special prosecutor, while the FBI preserves the inherent silence. Republicans and democrats again "dispersed in the corners," assessing political losses and bonuses.
It is likely that such a sluggish political struggle would not affect the mood of traders, if not for one "but": in February the bill on the temporary financing of government bodies expires. In other words, America again threatened by the shutdown - the third in a row over the past three months. On January 22 this year, hundreds of thousands of employees of US government agencies were forced to leave for unpaid leave because of the stalemate between Democrats and Republicans. A few days later, a compromise was found, but only with regard to the extension of the interim resolution. And this is the end of the next deadline this week, while politicians still can not find a common denominator on key issues.
The main "discord line" is to determine the status of 700,000 immigrants who were brought into the US at a minor age. Trump on March 5 planned to eliminate the program to protect the "dreamers" (this is the name of this category of people in the US), and the Republicans should take appropriate legislative steps in the Senate. Also, Trump's party members want to increase the costs of defense and border protection.
Democrats, in turn, oppose all points, and at the moment no compromise has been found. On Tuesday, the senators will try again to extend the interim funding, but in the light of Trump's latest statements, this will be even more difficult. Here it is worth noting that the work of the US government was long interrupted five years ago. Then the state institutions did not work for 16 days: subsequent calculations showed that the damage to the US economy amounted to a total of two billion dollars. Although in the context of the foreign exchange market, the dollar is more likely to be under the yoke of political instability, while material damage is of secondary importance.
In Europe, politics is also on the agenda. There is currently the formation of German "coalition", which has lasted for more than six months. Last Sunday, Angela Merkel began regular talks with the leader of the Social Democratic Party, Martin Schultz. On the agenda is the coordination of the list of candidates from the Social Democrats to government and other posts. It should be noted that the representatives of the youth wing of the SPD spoke sharply against the coalition with the Chancellor because of the domination of her party in power. Now there are political bargaining, but the mood remains optimistic: according to some experts, the coalition government can be formed within the next two days.
Thus, political factors have a key influence on the dynamics of the euro/dollar pair. The upward trend with the main objective 1.2580 (the top line of the Bollinger Bands indicator on D1) remains in force: the probability of this level is high, provided the successful outcome of the German coalition, against the backdrop of political instability in the United States.
