Pitfalls of the US labour market enabled EUR/USD bulls to go ahead

The Fed may not hurry with monetary normalization. The US non-farm payrolls increased by 213, 000 in June, the unemployment rate rose to 4% from 3.8%, and the average wages growth is slower than expected (+0.2 % against the expected +0.3%). This statistics enabled EUR/USD bulls to storm the resistance at 1.172 and draw the quotes towards the top border of the consolidation range 1.1515-1.1815. If the strong employment doesn’t get the inflation rate to rise, should one worry about the economy’s overheating?

During the first six months, non-farm payrolls were increasing by 215, 000 per month on average, though, in theory, the indicator should be slowing down, as the pool of available specialists is reduced. It is the opposite, due to a rise in the labor force participation rate (+601, 000 in June). Inspired by the US economic success, foreigners start looking for jobs there and get them sooner than they expected. It allows employers to put off increasing the wages. Average hourly earnings rose 2.7 % Y-o-Y, to $26.98 per hour. Its annual growth rate hasn't been over 3% since 2009, which enables the Fed to continue gradual monetary normalization.

Dynamics of wages and inflation rate in the USA

Source: Wall Street Journal. 

Technically, increased labour force should speed up the GDP growth, but Macroeconomic Advisers still expects the US economy to expand by 3.1% in the year-end. That is, it would slow down in July-December after the impressive rise in the second quarter. Because of trade battles as well.

The statistics on the US labour market in June strengthened dovish sentiment inside the Fed. Atlanta Fed’s president Raphael Bostic has joined the worries about a soon recession, expressed by Robert Kaplan, Neel Kashkari and James Bullard. He said that any drop of the yield curve to the red zone would be a definite sign of the recession.

Dynamics of the US yield curve
 

Source: Wall Street Journal

Weak statistics on the unemployment rate and average wages triggered closing long positions for the greenback. It rose by 5% in the second quarter, and some investors are likely to have taken the profits. Especially since 60% of 70 Reuters experts don’t expect dollar rally to last longer than three months. Median forecast for EUR/USD is at 1.19 in six months, and at 1.22 - in 12 months.

Does it mean that everybody should rush to buy euro now, hoping for a soon restoration of the uptrend? I wouldn’t recommend doing so. First, there hasn’t been a steady improvement of the Eurozone macroeconomic statistics. Second, Italy’s political risks can re-emerge in autumn, as the new government will present the budget. The ECB has been actively purchasing Italian bonds; the amount to European Central Bank is near 500bn. Therefore, the ECB ability to reduce the yield will be rather limited. As a result, the spread with German bonds will expand, featuring the first signs of political risks in the Euro-area. So, I still expect EUR/USD middle-term consolidation in the range of 1.15-1.2.  

 

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Dollar – Fed: the More Haste, the Less Speed

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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