After the stormy mid-June, the market calmed down significantly on its outcome, trying to clarify the positions of FOMC members on the rate. Despite a number of aggressive statements about its possible increase in 2022, the EUR/USD pair managed to find the ground under its feet thanks to John Williams' speeches and strong statistics on European business activity. The president of the Federal Reserve Bank of New York argues that it makes no sense to talk about tightening monetary policy before the US returns to full employment. If so, then the release of data on the US labor market is doubly important for investors.
According to Bloomberg experts, employment outside the agricultural sector will grow by 600,000 in June, unemployment will fall to 5.7%, and the average salary will increase by 0.4% MoM. The latter indicator has been growing for several months in a row, increasing the risks of further acceleration of inflation. At the same time, the FOMC hawks would certainly like to get a faster increase in employment. So far, incentive checks, the need for child care, and fear of the pandemic are keeping Americans from returning to the labor force, but by September the situation should seriously change. Moreover, some states have already canceled payments under fiscal incentives, which should affect the labor market statistics in June.
Dynamics of employment and unemployment benefits
Theoretically, the return of the base PCE to the maximum levels since the 1990s and further improvement in employment are strong arguments in favor of tightening the Fed's monetary policy, which creates a tailwind for the "bears" on EUR/USD. Moreover, according to Bloomberg experts, inflation in the eurozone will slow down from 2% to 1.9% in June. Prices in the eurozone do not grow as fast as in the US, which allows the ECB to adhere to an ultra-soft monetary policy for a very long time.
Investors' attention in the week of July 2 will be focused not only on the releases of data on the US labor market and European inflation but also on statistics on American business activity in the manufacturing sector from ISM. According to Nordea research, if the PMI ends the year at 60 or higher, which is most likely to happen, the S&P 500 will rise to 4,700. A drop in the purchasing managers' index to 55 will mean that the fair value of the US stock index corresponds to current levels. Finally, the peak of business activity to 50 is fraught with its decline to 3,730.
Dynamics of the S&P 500 taking into account different PMI levels
In my opinion, investors should adopt two main scenarios for the development of events at the turn of June and July. If the EUR/USD falls on expectations of strong statistics on US employment, we will start buying the pair on the facts. On the contrary, its growth due to the support of US stock indices will be a reason for sales against the background of strong data on the labor market.
Technically, there is a transformation of the Shark pattern to 5-0 on the daily chart of EUR/USD. The rally of the pair to the resistance at 1.2000 and 1.2055, identified by the 38.2% and 50% Fibonacci retracement levels of the CD wave, followed by a rebound from them, should be used to sell the euro against the US dollar.
EUR/USD, Daily chart
