According to yesterday's results, the euro-dollar pair was able to leave the established price range of 1.1830-1.1890, despite the increased intraday volatility. Traders have tested both borders of the above-mentioned range. After the release of the disappointing ADP report, EUR/USD bulls were marked at the borders of the 19th figure, but just a few hours later the pair was already at the lower border of the price echelon. The immediate reason for the general strengthening of the greenback was the speech of Fed Vice President Richard Clarida, who surprised traders with his hawkish rhetoric. For many months, he voiced dovish messages and in many ways echoed Fed Chairman Jerome Powell. Therefore, against the background of his unexpectedly harsh comments, both the yield of treasuries and the US dollar rose sharply.
By and large, Clarida did not say anything new – he only confirmed the rumors that had been circulating on the market for several weeks. The essence of these rumors boils down to the fact that the Fed will begin to tighten the parameters of monetary policy much earlier than the declared deadlines. These expectations of a hawkish nature keep the US currency afloat: the greenback, for example, restrained the blow from ADP, whose representatives published a failed report on the US labor market yesterday. But market participants reasonably came to the conclusion that ADP reports do not always correlate with official figures, and, therefore, it is not necessary to make hasty conclusions. The announced messages of the vice-president of the Fed only strengthened the position of the dollar, which once again showed its stress resistance.
So, Clarida said that the announcement of the beginning of taping can take place as early as this year. It should be recalled here that following the results of the July meeting, the Fed surprised traders with the phrase that it was observing "some progress" in moving towards the goals of maximum employment and price stability, the achievement of which would allow us to start "taping". The term Tapering is most often found in sports – it means reducing the amount of load after a heavy training block. Clarifying the above phrase, the central bank pointed out that "those sectors of the American economy that were most severely affected by the pandemic are showing improvement, but they have not fully recovered yet." In this context, the Fed clarified that monthly asset purchases will be carried out until "significant progress is made in moving towards the goals of maximum employment and price stability." The Fed's accompanying statement also states that the central bank" will continue to assess the progress of the economy at the next meetings."
Comparing the theses of the final communique and the rhetoric of Clarida, we can come to the conclusion that the Fed is slowly beginning to prepare the ground for curtailing QE. Do not forget that at the end of August, an economic symposium will be held in the US city of Jackson Hole, which will become the central event of the month. Given the hawkish comments of the Fed vice president, it can be assumed that the head of the central bank will also tighten his rhetoric, allowing for a gradual curtailment of incentives already within this year. In this context, the Non-farm, which is set to be released tomorrow, will play an important role. If the US labor market does not slow down its growth rate (for this it is necessary that all indicators come out at least at the forecast level), the probability of implementing the above scenarios will largely increase. Hawkish expectations will push the dollar up throughout the market.
Clarida also did not avoid another pressing issue, which concerns the fate of the interest rate. In this case, he also supported the greenback. In his opinion, all the necessary conditions for the start of the rate increase will be met "by the end of next year." Therefore, the first step towards tightening the parameters of monetary policy should be expected either at the December meeting of 2022, or at one of the first meetings of 2023. At the same time, the Fed's median forecast, published at the June meeting, suggests that the rate will remain in the current range until at least the second half of 2023.
Summarizing his speech, Clarida emphasized that the decisions of the central bank on monetary policy (both regarding QE and the rate) do not depend on forecasts, but "primarily on the incoming data."
That is why tomorrow's Nonfarms play such an important role - and not even in the context of possible decisions on the part of the Fed, but primarily in the context of market expectations. If the release comes out at the level of forecasts (not to mention the green zone), the dollar will significantly strengthen its positions throughout the market, including against the euro. Otherwise, EUR/USD bulls will again get a reason for corrective growth. However, this growth can also be used to open short positions - apparently, the uncorrelation of the positions of the Fed and the ECB will only intensify in the near future, thereby putting pressure on the pair. Therefore, it is reasonable to consider any northern bursts of EUR/USD as a reason for entering sales. The main support level (i.e. the main target) is the Bollinger Bands middle line on the same timeframe, which corresponds to 1.1810.
