In the foreign exchange market, it rarely happens when traders receive unambiguous signals of a fundamental nature: as a rule, one of the components of the release is "knocked out" of the general rut, thereby sowing doubts about a particular trading decision. The same applies to the comments of representatives of the Central Bank – officials often use "streamlined" phrases, avoiding specifics.
And yet, sometimes market participants receive very categorical messages that allow them to draw certain conclusions of an equally categorical nature. Today's situation is from this category. All components of US nonfarm payrolls have entered the "green zone", increasing the likelihood of an early curtailment of QE and an interest rate increase at the end of next year. The relatively modest reaction of traders to this fact can be explained by the "coronavirus factor" – the epidemiological situation in the United States has significantly worsened, exerting background pressure on the greenback. But this factor is unlikely to be able to keep the dollar from further growth, given the reaction of the authorities to the coronavirus reports.
So, today's release really pleased the dollar bulls, despite the rather weak ADP report, which preceded the official figures. The number of people employed in the private sector increased by 700,000, although, according to data from the ADP agency, the increase in the number of people employed in this sector amounted to just over 300,000. By the way, this fact also indicates a weak correlation of these reports, although, in the "pre-crisis" times, ADP served as a kind of "petrel" on the eve of the release of official data. To date, the weak ADP report has de facto strengthened the positive effect of strong nonfarm payrolls. After all, an annual record was recorded today – 943,000 jobs created. The last time the US labor market showed such high figures was in August 2020 (1.5 million jobs were created then).
We can say that the July nonfarm payrolls leveled investors' concerns about the dynamics of the US labor market. All the components of the release came out in the "green zone", and even the growth rates of salaries came out in the "green zone", even despite quite optimistic expectations. Today's figures (0.4% MoM and 4.0% YoY) complemented the impressive increase in the number of people employed in the non-agricultural sector. In the private sector of the economy, the indicator also showed strong dynamics – an increase of 703,000 with a growth forecast of 680,000. The number of people employed in the manufacturing sector of the economy increased by 27,000 at once. The unemployment rate did not disappoint either: contrary to forecasts of growth to 5.7%, it reached 5.4%. The share of the economically active population has also increased to 61.7% (the best result since April this year).
In general, the US labor market has developed its "cruising speed". The key indicator has been consistently growing over the past four months: 278,000 jobs were created in April, 580,000 in May, 938,000 (the June indicator was revised upwards from the previous value of 850,000), 943,000 in July.
Such dynamics speak not only about the recovery of the US economy – the market is increasingly suggesting that the Federal Reserve will decide to tighten the parameters of monetary policy ahead of the declared deadlines. For example, the first signals regarding the curtailment of QE can be announced already at the September meeting of the Fed. There are also suggestions in the market that Jerome Powell may make a corresponding statement at the economic symposium in Jackson Hole, which is scheduled for the end of August.
It is also necessary to recall the recent statement of Fed Vice Chairman Richard Clarida. He said that "at the next meetings" the Federal Reserve will assess the progress in moving towards the target levels (primarily in the labor market and inflation), after which it can notify the markets about the upcoming beginning of the curtailment of the stimulus program. Summarizing his speech, Clarida stressed that the Central Bank's decisions on monetary policy (both regarding QE and the rate) do not depend on forecasts, but "primarily on incoming data". Such unexpectedly harsh comments (as for Clarida, who largely echoes Powell) provoked rumors that the Federal Reserve is gradually beginning to prepare the ground for the appropriate steps of the Fed. It can be assumed that the head of the Central Bank at the economic symposium will also tighten his rhetoric, allowing a gradual curtailment of incentives already within this year.
Thus, the main support for the dollar will now be provided by the "hawkish" expectations of investors. This will be especially evident in the euro-dollar pair. The uncorrelation of the positions of the ECB and the Fed is becoming more pronounced – and this fact serves (and will continue to serve) as the main anchor for EUR/USD.
According to the results of today's release, the pair left the range of 1.1830-1.1900 (within which it was trading during the week), falling to the area of the 17th figure. From the technical point of view, the pair is located between the middle and lower lines of the Bollinger Bands indicator on the daily chart, as well as under all the lines of the Ichimoku indicator, which formed a bearish "Line Parade" signal. All this indicates the priority of short positions. The first support level is located at 1.1740 - this is the lower line of the Bollinger Bands on D1. The main support level is located at 1.1680 - this is also the lower line of the Bollinger Bands, but already on a weekly time frame.
The material has been provided by InstaForex Company - www.instaforex.com