The final trading day of the week was packed with major events. Following a publication of the US nonfarm payrolls for February, the US dollar index soared to the highest level in 3.5 months. Yields of 10-year US Treasuries climbed to 1.6%. EUR/USD tested the level of 1.18 for the first time since November of 2020. Such records were achieved because all metrics in the US nonfarm payrolls came in better than expected, thus proving a recovery in the US labor market. Besides, both Chambers of the US Congress led by Democrats agreed on the final version of the stimulus bill. Amid yesterday's neutral speech by Fed's Chairman Jerome Powell and the overall optimism about the long-awaited approval of the relief package, the US dollar surged overnight across the board, breaking multi-year support and resistance levels.
Back to the nonfarm payrolls. The report released today encouraged the dollar bulls despite a weak employment report by the ADP payroll processor a day earlier. According to the government data, the US public and private sectors added 379,000 jobs, though the ADP employment report logged 177,000 new jobs in February.
In fact, the nonfarm payrolls for February dispelled investors' fears about the dismal state of affairs in the labor market. All key metrics turned out to be stronger than the consensus. A wage growth is the only score which came in line with expectations. Wages in the US rose 0.2% m/m and 5.3% y/y that did not arouse concerns among investors as they attach the most importance to a notable rise in the number of employed Americans. The private sector created 420,000 jobs whereas analysts had projected 120,000 new jobs.
The number of jobs in the manufacturing sector increased 21,000 at once, the strongest result over the latest 4 months. Investors are also pleased about the unemployment rate which inched down to 6.2% after 6.3% in January, defying forecasts for a growth to 6.5%. Importantly, this is a lagging indicator. Thus, the indicator released today mirrors a dynamic of January.
On the whole, the US labor market is picking up steam. In the pre-crisis period, most experts shared the viewpoint that the labor market is considered healthy as long as the US economy creates 200,000+ jobs per month. In other words, such employment growth was viewed as a barometer of the US economic health. This barometer was closely watched by experts, traders and the Federal Reserve. Under the pandemic-driven crisis, employment growth with 300,000+ new jobs is great evidence of a recovery in the US economy.
With such trends, speculations resurfaced about scaling down the Fed's QE program ahead of schedule and a course for a tighter monetary policy. Interestingly, yesterday the Fed's leader assured market participants that the regulator aimed to carry on with stimulus measures, alllwo9g inflation to climb above the 25 target level. Besides, he said at the conference that actual unemployment was much higher. According to his estimates, almost 10 million able-bodied Americans were seeking for jobs. Judging by the dynamic of US Treasuries, traders are certain that the US economy will regain momentum in the second half of the year. Consumer activity is widely expected to boost thanks to savings amassed by households during the pandemic. Bloomberg analysts reckon that Americans have accumulated the total amount of over $1.5 trillion.
All in all, the fundamental background at present benefits the US dollar. The nonfarm payrolls are beyond expectations. Jerome Powell decided not to scare investors with control over Treasury yields and expressed the dovish rhetoric. Even though the strong US dollar is the least wanted by the Federal Reserve now, the fact is that the regulator is not going to prevent its appreciation. All other factors contribute to the greenback reinforcement to some degree.
From the point of technical analysis, EUR/USD broke the lower border of the Bollinger Bands in the daily chart. Now the pair is below all lines of the Ishimoku indicator, including the Kumo cloud. At the same time, Tenkan-sen and Kijun-sen lines have crossed. It means that the Ishimoku has formed a bearish signal, the Cluster of lines that warns about a further decline. Notably, the key support with intermediate levels of 1.1900 and 1.1850 is located at 1.1750 in the medium term which coincides with the lower border of the Bollinger Bands on the weekly chart. In parallel, it is also Tenkan-sen line on the one-month chart.
If the buyers have 1.2000 out of their hands, the price is set to sink 150 pips to support of 1.1750. this is just a question of time. Actually, the pair will drop one step deeper. Instead of the corridor of 1.2000 – 1.2200, traders will enter the corridor of 1.1600 – 1.1800 where they were trading for the whole autumn of 2020. Bearing in mind the Friday factor, it would be better to take trading decisions on EUR/USD on Monday when we will assess the extent of a correction. The correction is imminent after such a strong bearish move.
