Report on the US employment proved that one shouldn’t yet get rid of the greenback
Dollar responds to the strong statistics on the US employment in October with a rather weak success. Goldman Sachs has defined its bearish projects for the USD rate. According to the bank, the greenback’s response to the US employment data is further evidence of how hard it will be to go higher for it. Dollar’s opponents should have been defeated by highest average wages rate since 2009 (+3.1% YoY), the unemployment rate, at its almost five-decade lows (3.7%) and an impressive growth of non-farm payrolls (+250,000). In fact, EURUSD has lost just a half of a figure.
Dynamics of the US average wages
Source: Wall Street Journal
The strong US employment data should hypothetically increase the probability of the Fed’s monetary normalization. First, a decline in unemployment after a long time of expectations started to push the wages, the leading indicator for the PCE, up. The Phillips curve still works; and, taking the FOMC projection for the unemployment rate at 3.5% in 2019 into account, I can assume that the risks of a higher inflation growth pace still make the Fed worry. Second, a higher pace of average wages growth can be estimated as the labour shortage. Employers increase wages in order to keep employees. It also results in faster growth of consumer prices.
So, if anybody expected the central bank to sound dovish at its October FOMC meeting, influenced by the U.S. president’s criticism or (and) by a slower inflation growth in autumn, they start to doubt. And, in general, it may turn out that the strong report on the US employment didn’t result in a higher dollar surge because it runs out of advantages. Ahead the important release, dollar was falling down because of some tentative optimism about trade wars, and the GBP strengthening, resulted from the talks about soft Brexit and the hawkish rhetoric of the Bank of England. The former greenback buyers started selling it, taking the profits, and got into the trap of missed profits. What if it is too early to exit the USD longs?
The market is still puzzled by the question, if it is not the US dollar, than what is worth buying? The euro trend doesn’t suggest the expansion of the euro area economy. Yes, it was growing fast in 2017; but it was rather the recovering of the eurozone, pressed down by the fiscal consolidation policy, due to the domestic demand. No expansion will be possible until the Italy’s crisis is settled down. I don’t think that, if the US mid-term elections’ results meet the social polls (Republicans will take the majority in the Senate, Democrats – in the House of Representatives), the greenback will somehow respond. The FOMC meeting in November seems to a more important event for the EURUSD pair that is still forming the short-term consolidation range of 1.13-1.15.
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Price chart of EURUSD in real time mode
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