The US markets are closed today for a bank holiday. The country is celebrating Independence Day. Anyway, despite the federal holiday, dollar-related currency pairs are trading with high volatility. Importantly, the greenback is losing ground against major currencies. The US dollar index is trading lower, heading towards 91.
The latest US nonfarm payrolls that were released last Friday did not trigger the dollar's rally. On the contrary, the market attached importance to the negative sides of the official data. As a result, the US currency came under selling pressure. Today EUR/USD is trading with the same dynamic as on Friday amid the empty economic calendar. Bearing in mind that the American trading floors are shut, we should trust unfolding trends. Indeed, the nonfarm payrolls for June reflected the ongoing recovery in the US labor market. Besides, the data allowed the Federal Reserve to keep its hawkish rhetoric. The negative response from traders to the employment data comes as a result of their too high expectations. At the moment, there are no convincing reason for the greenback's weakness, especially against the euro which is weighed down by the dovish ECB stance.
Let me remind you that according to the nonfarm payrolls for June, the US economy created 850K jobs, excluding farm employees, beyond expectations for a 700K increase. The employment in the US has been growing for two months straight. In the US private sector alone, the situation is similar. The number of jobs has been increasing in May and June, thus reflecting the overall economic recovery. On Friday, the US private sector added 662K jobs whereas analysts had projected a 600K growth.
The unemployment rate was the fly in the ointment. In fact, it logged an uptick last month. The jobless rate in the US edged up to 5.9% in June. According to flash estimates, this indicator should have inched down to 5.6% in June from 5.8% in May.
Importantly, it is a lagging economic indicator. So, the data released on Friday reveals the state of affairs in May. Another thing, some experts highlighted that a large number of Americans will receive extra unemployment benefits. Bearing this information in mind, they will be seeking for jobs vigorously in September – October. Nevertheless, the jobless rate is set to go on with its decline to 5%.
All in all, traders took gave priority to this component of the report, thus escalating pressure on the greenback. Defying expectations of most analysts, the June nonfarm payrolls did not trigger the greenback's rally. The bottom line is that the employment data for June will enables the US Fed to take the wait-and-see approach on the QE prospects.
By the way, literally the day after tomorrow - that is, on Wednesday - the minutes of the last Fed meeting will be published in the US. This document can become a starting point in terms of strengthening the American currency, but only on one condition. The Fed has to more specifically outline the time frame for scaling back the volume of bond purchases. Let me remind you that the policy decisions of the June meeting of the Federal Reserve reinforced significantly the value of the US dollar thanks to the updated agenda: 11 out of 18 members of the rate-setting committee expect a double increase in interest rates in 2023. At the same time, Jerome Powell spoke rather vaguely about the prospects for tapering QE. If the minutes released on Wednesday clear up this issue, the US dollar will again gain momentum across the board.
Importantly, some ECB representatives are also in favor of scaling back monetary stimulus. For example, head of the Bundesbank Jens Weidmann last week called on the European Central Bank to begin a gradual reduction in the volume of bond buying as part of the anti-crisis program. Arguing his position, he pointed to the growth of inflationary pressures in the eurozone. "Hawkish" notes are voiced by some other representatives of the regulator (in particular, Vice President of the ECB Luis de Guindos). However, most of their colleagues still defend the "dovish" stance - first of all, ECB Managing Director Christine Lagarde. According to her, the European economy, which "has just begun to recover," is still under threat, including due to the spread of a new coronavirus strain. In addition, most experts believe that the Fed can begin to taper its QE faster than the European Central Bank, since inflationary pressure in the eurozone is much softer (and today's publication confirms this). So, the European regulator "can afford" to maintain an accommodation policy for much longer than the Fed. At the last meeting, the US central bank revised its rhetoric towards hawkish.
That is why the minutes of the June Fed's meeting can trigger quite strong volatility, if the regulator confirms its hawkish intentions. All other fundamental factors will have a short-term impact on the pair. For example, today the pair showed bullish momentum in light of the release of the revised PMIs in Europe. Most of them were revised upwards, and EUR/USD buyers took advantage of this fact.
But already at the start of the American session, the upward impulse faded, and the pair returned to the level of 1.1850. Tomorrow, on July 6, during the European session, the ZEW indices will be unveiled. During the American session, the market will get to know the ISM Services PMI. In my opinion, any notable advance in the pair (which does not exceed the resistance level of 1.1970) should be used to open short positions with the first target at 1.1850. The main target is at near 1.1806 that is a three-month low reached last week.
*Prezentowana analiza rynku ma charakter informacyjny i nie jest przewodnikiem po transakcji.
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