If the US labor market is not as robust as anticipated, the optimal time for the Fed to reduce rates is now. In fact, some FOMC officials were prepared to do so as early as July. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Highlights and key points
- US jobs data revision says the US labor market was not overheated.
- Some FOMC members were ready to cut rates in July.
- The market is buying the rumor – Jerome Powell’s dovish rhetoric.
- The EURUSD may pull back if it falls below 1.111.
Weekly fundamental forecast for euro
Economic expansions do not end on their own accord. The lifespan of an economic expansion is ultimately determined by the actions of central banks. If Jerome Powell is successful in achieving a soft landing for the US economy, he will make history. If he fails, he will add another case study to the rule. The Fed would like to implement a rate cut, but first, it must identify the optimal timing and magnitude of such a move. As the cut approaches, the EURUSD pair is trending upward.
It is widely acknowledged that monetary policy exerts an influence on the economy with a time lag. For an extended period, the resilience of the US labor market has been attributed to this rule. However, the most significant revision of new jobs since 2009 demonstrated that employment from April 2023 through March was 818K less than the initial estimation. The monthly average declined from 246K to 178K.
US unemployment data revision
Source: Bloomberg.
It has been revealed that the labor market was not as overheated as previously assumed. This also helps to explain why inflation has fallen from 7% approximately two years ago to 2.5%. Furthermore, it serves to intensify the Fed’s concerns regarding the accelerated increase in unemployment. The rate of increase has been relatively gradual, rising from 3.7% at the beginning of the year to 4.3%. However, historical data indicates that unemployment tends to increase gradually but rapidly. As anticipated, the minutes of the July FOMC meeting revealed that several officials had identified the potential for a gradual deterioration in labor market conditions to result in a more pronounced cooling.
It is not surprising that some participants in that meeting were ready to vote for rate cuts as early as July, which was a revelation to investors and led to a further increase in EURUSD quotes. The majority of participants agreed to wait until September, but if the Fed had been aware of the disappointing employment figures in July, it would have eased monetary policy.
In light of these circumstances, the likelihood of a 50 bp reduction in borrowing costs in September appears justified. Following the revision of the employment data, the figure increased from less than 30% to 35%. Investors are awaiting comments from Jerome Powell on this matter at the Jackson Hole symposium. It is evident that the EURUSD rally has been characterized by a divergence in monetary policy.
Futures markets indicate that the ECB will implement two further rounds of easing in 2024, with a high probability of one 50 bp cut by the Fed. The latter will act more promptly in response to a cooling labor market, which will allow the euro to perform strongly against other G10 currencies in August.
G10 currencies against US dollar
Source: Reuters.
Weekly trading plan for EURUSD
Despite the EURUSD‘s bullish performance, investors are still influenced by the dovish rhetoric expressed by Jerome Powell at the Jackson Hole symposium. However, another event could also trigger a sell-off based on actual data. For instance, weak business activity statistics in Europe could lead to a decline in the euro below 1.111 or a rebound from the resistance at 1.1185. This could be an opportunity to open short trades.
Price chart of EURUSD in real time mode
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