The strong US employment data has increased the chances of further monetary tightening by the Fed, which is good news for EURUSD bears. However, the currency pair is in no hurry to fall. Why? Let us discuss the Forex outlook and make up a trading plan.
Fundamental US dollar forecast for a week
The unusually large number of jobs in the US is a strong argument in favor of another huge step by the Fed in tightening monetary policy. In July, employment rose by 528,000, and unemployment fell to 3.5%, the lowest level since 1969. These factors forced the futures market to increase the chances of raising the federal funds rate by 75 basis points in September from 40% to 70%. Treasury yields rose, stock indices fell, but EURUSD bears failed to capitalize on favorable conditions.
It took 2.5 years to fully recover US employment after the pandemic. Although the pace has slowed in recent months, the labor market remains very hot. This is a double-edged sword for the Fed. On the one hand, the probability of a recession in the US economy is significantly reduced. On the other hand, strong data may lead to the consolidation of inflation at a high level due to accelerated wage growth. In July, it increased by 5.2% YoY, exceeding the forecast of Bloomberg experts.
The Fed still has a lot of work to do. FOMC member Michelle Bowman noted that an increase in borrowing costs by 75 basis points should be considered until inflation starts to decline consistently and sustainably. Investors immediately recalled that after the July Fed meeting, Jerome Powell said another extremely large rate hike may be appropriate and would depend on the data. Charles Evans of the Federal Reserve Bank of Chicago argues that a 75 bps increase in September could be fine if things don’t improve.
It seems that the Fed is forced to both accelerate and make more efforts than expected before the release of the July jobs report. CME derivatives raised the expected peak for the federal funds rate from 3.46% to 3.64%. Fears of an economic downturn are declining. Thus, the situation is really different from previous recessions, when employment declined. Now it is growing.
Curiously, the Japanese labor market has been strong and economic growth sluggish. The main reasons were an aging population and insignificant immigration. These factors have also affected the global economy during and after the pandemic. As a result, Japan struggled with deflation for a long time, which was uncharacteristic for the United States.
EURUSD trading plan for a week
If the market does not develop according to the predictions, it will likely go in the opposite direction. EURUSD bears failed to benefit from ideal conditions. Is it time to buy the euro? In my opinion, investors are waiting for a slowdown in inflation in the US. However, inflation must fall significantly and sustainably for the Fed to slow down. This is unlikely to have happened in July. Thus, sales toward at least the lower border of the trading range of 1.01-1.03 should become relevant.