The stable labor market allowed EURUSD bears to take the upper hand. Furthermore, US inflation data is forthcoming. It is expected to accelerate, which will strengthen the US dollar. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US labor market figures were better than expected.
- Donald Trump calls on the Fed to cut rates aggressively.
- The unemployment rate may accelerate quickly.
- Long trades on the EURUSD pair can be considered if it returns to 1.1445.
Weekly US Dollar Fundamental Forecast
Investors showed signs of concern ahead of the release of the May labor market report. Private sector employment from ADP declined sharply, jobless claims surged, and the Challenger, Gray & Christmas survey indicated a notable increase in layoffs at the end of spring. The nonfarm payrolls expanded by 139,000, which has led to a sense of stability. While there are signs of a cooling economy, it is not on the verge of a collapse, allowing EURUSD bears to initiate a counterattack. However, how long will this bearish momentum last?
While fear has abated, its lingering effects persist. The data for the previous two months was revised downward by 95,000. According to Bloomberg, the unemployment rate is not rising for a reason. The issue is not the abundance of job opportunities but rather the high rate of resignations. In the face of tariff policy uncertainty, firms are taking measures to retain their employees. However, as soon as tangible signs of financial distress appear, layoffs will begin to mount. Unemployment is projected to rise significantly, prompting the Fed to take aggressive action to reduce interest rates.
US Nonfarm Payrolls and Unemployment Rate
Source: Bloomberg.
This is precisely what Donald Trump is urging the central bank to do. He asserts that the opportunity to act decisively has already passed. The cost of borrowing must be reduced by one percentage point immediately, from 4.5% to 3.5%. The US administration emphasized that the Fed may miss an opportunity to act in a timely manner to address a rapid increase in unemployment, as well as miss its inflation target once again, echoing its previous failure to curb inflation effectively.
It appears that Jerome Powell is trying to estimate the distribution of the impact of tariffs, considering its implications for consumer prices and the labor market. The baseline scenario suggests a gradual and, most importantly, temporary acceleration of inflation, accompanied by a slowdown in economic growth. However, there is always a possibility of an unfavorable outcome.
Consumer Price Index (CPI) and Producer Price Index (PPI) data for May can offer some insight into current market trends. Core inflation is expected to accelerate to 0.3% month-on-month and 2.9% year-on-year. Such trends would align with the Fed’s perspective and provide it with the flexibility to disregard any criticism it might receive from Donald Trump.
US Inflation Change
Source: Bloomberg.
The EURUSD pair’s increased sensitivity to employment and inflation data suggests that investors are gradually becoming accustomed to the US tariff policy. Markets are turning back to familiar factors where the Fed’s monetary policy drives asset prices. Notably, the Fed policy depends on data.
Could it be any different, given that Donald Trump’s strategy is clear, US-China trade talks have resumed, and the US court is ready to overturn the 50% tariff hike on steel and aluminum imports at any moment?
Weekly EURUSD Trading Plan
The EURUSD pair is showing signs of recovery following the release of employment data. The market is preparing to digest the inflation report. There are signs that traders want to buy the dip. If the major currency pair returns above 1.1445, long trades can be considered.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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